Costco 2009 Annual Report Download - page 44

Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment holdings
that are diversified amongst money market funds, debt securities, corporate notes and bonds, and
enhanced money funds with effective maturities of generally three months to five years at the date of
purchase. The primary objective of our investment activities is to preserve principal while continuing to
generate yields. A revised investment policy was approved in December 2007 by our Board of
Directors, limiting future investments to direct U.S. Government and Government Agency obligations,
repurchase agreements collateralized by U.S. Government and Government Agency obligations, and
U.S. Government and Government Agency Money Market funds.
The investment policies of our subsidiaries are consistent with our primary objective to preserve
principal while continuing to generate yields. Our wholly owned insurance subsidiary invests in U.S.
Government and Government Agency obligations, corporate notes and bonds, and asset and
mortgage backed securities with a minimum overall portfolio average credit rating of AA+.
All of our foreign subsidiaries’ investments are primarily in money market funds, investment grade
securities, bankers’ acceptances, bank certificates of deposit and term deposits, all denominated in
their local currencies. Additionally, our Canadian subsidiary may invest a portion of its investments in
U.S. dollar investment grade securities and bank term deposits to meet current U.S. dollar obligations.
All of the investment policies of the Company and subsidiaries are reviewed at least annually.
Because most of our investments in cash and cash equivalents are of a short-term nature, if interest
rates were to increase or decrease, the impact would likely be immaterial to our financial statements.
Based on our overnight investments and bank balances within cash and cash equivalents at the end of
2009 and 2008, a 100 basis point increase or decrease in interest rates would result in an increase or
decrease of approximately $24 and $18 (pre-tax), respectively, to interest income on an annual basis.
For those investments that are classified as available-for-sale, the unrealized gains or losses related to
fluctuations in market volatility and interest rates are reflected within stockholders’ equity in
accumulated other comprehensive income.
The nature and amount of our long and short-term debt may vary as a result of future business
requirements, market conditions and other factors. As of the end of 2009, our fixed-rate long-term debt
included: $42 principal amount at maturity of 3.5% Zero Coupon Convertible Subordinated Notes
carried at $32; $900 of 5.3% Senior Notes carried at $899; and $1,100 of 5.5% Senior Notes carried at
$1,096, and additional notes and capital lease obligations totaling $228. Additionally, our variable rate
long-term debt included a 0.35% over Yen Tibor (6-month) Term Loan of $32. Fluctuations in interest
rates may affect the fair value of the fixed-rate debt and may affect the interest expense related to the
variable rate debt. See Note 3 to the consolidated financial statements included in Part II, Item 8 of this
Report for more information on our long and short-term debt.
Foreign Currency-Exchange Risk
Our foreign subsidiaries conduct limited transactions in their non-functional currencies, which exposes
us to fluctuations in foreign currency exchange rates. We manage these fluctuations, in part, through
the use of forward foreign exchange contracts, seeking to hedge the impact of fluctuations of foreign
exchange on known future expenditures denominated in a foreign currency.
As of August 30, 2009, and August 31, 2008, we held forward foreign exchange contracts with a
notional amount of $183 and $90, respectively, and a fair value liability of $2 and a fair value asset of
$5, respectively, on the consolidated balance sheets. A hypothetical 10% strengthening of the
functional currency compared to the non-functional currency exchange rates at August 30, 2009 and
August 31, 2008 would have decreased the fair value of the contracts by $18 and $10, respectively.
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