EMC 2010 Annual Report Download - page 68

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables represent our fair value hierarchy for our financial assets and liabilities measured at fair value as of December 31, 2010 and 2009
(in thousands):
December 31, 2010
Level 1 Level 2 Level 3 Total
Cash $ 1,534,786 $ — $ — $ 1,534,786
Cash equivalents 2,522,172 62,180 — 2,584,352
U.S. government and agency obligations 993,165 753,229 — 1,746,394
U.S. corporate debt securities — 1,251,626 — 1,251,626
High yield corporate debt securities — 437,832 — 437,832
Asset-backed securities — 34,881 — 34,881
Municipal obligations — 1,095,901 — 1,095,901
Auction rate securities — — 146,044 146,044
Foreign debt securities — 659,415 — 659,415
Total cash and investments $ 5,050,123 $ 4,295,064 $ 146,044 $ 9,491,231
Other items:
Foreign exchange derivative assets $ — $ 19,655 $ — $ 19,655
Foreign exchange derivative liabilities — (21,975) — (21,975)
Commodity derivative liabilities — (647) — (647)
Interest rate swap contracts — (7,762) — (7,762)
December 31, 2009
Level 1 Level 2 Level 3 Total
Cash $ 1,201,026 $ — $ — $ 1,201,026
Cash equivalents 5,101,473 — — 5,101,473
U.S. government and agency obligations 621,726 470,086 — 1,091,812
U.S. corporate debt securities — 640,014 — 640,014
High yield corporate debt securities — 238,231 — 238,231
Asset-backed securities — 14,474 — 14,474
Municipal obligations — 590,474 — 590,474
Auction rate securities — — 234,452 234,452
Foreign debt securities — 275,705 — 275,705
Total cash and investments $ 6,924,225 $ 2,228,984 $ 234,452 $ 9,387,661
Other items:
Foreign exchange derivative assets $ — $ 15,136 $ — $ 15,136
Foreign exchange derivative liabilities — (23,275) — (23,275)
Our auction rate securities are predominantly rated AAA and are primarily collateralized by student loans. The underlying loans of all but two of our
auction rate securities, with a market value of $19.1 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan
Program ("FFELP") through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities.
The two securities whose underlying loans are not guaranteed by the U.S. government have credit enhancements and are insured by third party agencies. We
believe the quality of the collateral underlying all of our auction rate securities will enable us to recover our principal balance in full.
To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model. The assumptions used in
preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market ("liquidity discount margin") for an
estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC
acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of
liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 1% at both December 31, 2010 and
December 31, 2009 as credit spreads on AA-rated banks remained constant.
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