Discover 2009 Annual Report Download - page 123

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Key estimates used in measuring the fair value of the interest-only strip receivable at the date of securitization that
resulted from credit card securitizations completed were as follows:
For the Years Ended
November 30,
2009 2008
Weighted average life (in months)..................................................................................................................... 1.8 – 4.8 3.0 – 5.1
Payment rate (rate per month) .......................................................................................................................... 17.18% – 18.16% 18.85% – 19.80%
Principal charge-offs (rate per annum) ............................................................................................................... 9.66% – 9.83% 5.10% – 5.65%
Discount rate (rate per annum) ......................................................................................................................... 16.00% – 17.00% 12.00%
Key estimates and sensitivities of reported fair values of certain retained interests to immediate 10% and 20% adverse
changes in those estimates were as follows (dollars in millions):
November 30,
2009 2008
Interest-only receivable strip (carrying amount/fair value) ................................................................................................................ $ 118 $ 300
Weighted average life (in months) .................................................................................................................................................. 3.5 4.6
Weighted average payment rate (rate per month) ............................................................................................................................. 18.70% 18.52%
Impact on fair value of 10% adverse change ................................................................................................................................. $ (4) $ (21)
Impact on fair value of 20% adverse change ................................................................................................................................. $ (7) $ (39)
Weighted average principal charge-offs (rate per annum).................................................................................................................. 9.91% 6.83%
Impact on fair value of 10% adverse change ................................................................................................................................. $ (46) $ (55)
Impact on fair value of 20% adverse change ................................................................................................................................. $ (81) $ (110)
Weighted average discount rate (rate per annum)............................................................................................................................. 16.50% 12.50%
Impact on fair value of 10% adverse change ................................................................................................................................. $ — $ (1)
Impact on fair value of 20% adverse change ................................................................................................................................. $ (1) $ (3)
Cash collateral accounts (carrying amount/fair value)...................................................................................................................... $ 823 $1,121
Weighted average discount rate (rate per annum)............................................................................................................................. 1.99% 2.59%
Impact on fair value of 10% adverse change ................................................................................................................................. $ (3) $ (7)
Impact on fair value of 20% adverse change ................................................................................................................................. $ (7) $ (13)
Certificated retained beneficial interests reported as available-for-sale investment securities (carrying amount/fair value)........................ $2,205 $ 982
Weighted average discount rate (rate per annum)............................................................................................................................. 6.58% 10.29%
Impact on fair value of 10% adverse change ................................................................................................................................. $ (14) $ (13)
Impact on fair value of 20% adverse change ................................................................................................................................. $ (27) $ (25)
The sensitivity analyses of the interest-only strip receivable, cash collateral accounts and certificated retained beneficial
interests are hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an
estimate generally cannot be extrapolated because the relationship of the change in the estimate to the change in fair
value may not be linear. Also, the effect of a variation in a particular estimate on the fair value of the interest-only strip
receivable, specifically, is calculated independent of changes in any other estimate; in practice, changes in one factor
may result in changes in another (for example, increases in market interest rates may result in lower payments and
increased charge-offs), which might magnify or counteract the sensitivities. In addition, the sensitivity analyses do not
consider any action that the Company may take to mitigate the impact of any adverse changes in the key estimates.
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