Cisco 2012 Annual Report Download - page 83

Download and view the complete annual report

Please find page 83 of the 2012 Cisco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 152

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our financial position is exposed to a variety of risks, including interest rate risk, equity price risk, and foreign
currency exchange risk.
Interest Rate Risk
Fixed Income Securities We maintain an investment portfolio of various holdings, types, and maturities. Our
primary objective for holding fixed income securities is to achieve an appropriate investment return consistent
with preserving principal and managing risk. At any time, a sharp rise in market interest rates could have a
material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in
interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest
income for our investment portfolio. We may utilize derivative instruments designated as hedging instruments to
achieve our investment objectives. We had no outstanding hedging instruments for our fixed income securities as
of July 28, 2012. Our fixed income investments are held for purposes other than trading. Our fixed income
investments are not leveraged as of July 28, 2012. We monitor our interest rate and credit risks, including our
credit exposures to specific rating categories and to individual issuers. As of July 28, 2012, approximately 80%
of our fixed income securities balance consists of U.S. government and U.S. government agency securities. We
believe the overall credit quality of our portfolio is strong.
The following tables present the hypothetical fair values of our fixed income securities, including the hedging
effects when applicable, as a result of selected potential market decreases and increases in interest rates. The
market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points
(“BPS”), plus 100 BPS, and plus 150 BPS. Due to the low interest rate environment at the end of each of fiscal
2012 and fiscal 2011, we did not believe a parallel shift of minus 100 BPS or minus 150 BPS was relevant. The
hypothetical fair values as of July 28, 2012 and July 30, 2011 are as follows (in millions):
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
DECREASE OF X BASIS POINTS
FAIR VALUE
AS OF
JULY 28,
2012
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
INCREASE OF X BASIS POINTS
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
Fixed income securities ........ N/A N/A $37,483 $37,297 $37,111 $36,924 $36,737
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
DECREASE OF X BASIS POINTS FAIR VALUE
AS OF
JULY 30, 2011
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
INCREASE OF X BASIS POINTS
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
Fixed income securities ........ N/A N/A $35,740 $35,562 $35,384 $35,206 $35,029
Impairment charges on our investments in fixed income securities were not material for fiscal 2012, 2011, or
2010.
Debt As of July 28, 2012, we had $16.0 billion in principal amount of senior notes outstanding, which consisted
of $1.25 billion floating-rate notes and $14.75 billion fixed-rate notes. The carrying amount of the senior notes
was $16.3 billion, and the related fair value was $18.8 billion, which fair value is based on market prices. As of
July 28, 2012, a hypothetical 50 BPS increase or decrease in market interest rates would change the fair value of
the fixed-rate debt, excluding the $4.25 billion of hedged debt, by a decrease or increase of $0.6 billion,
respectively. However, this hypothetical change in interest rates would not impact the interest expense on the
fixed-rate debt, which is not hedged.
75