MasterCard 2010 Annual Report Download - page 104

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—continued
Financial Instruments—Recurring Measurements
The distribution of the fair values of the Company’s financial instruments which are measured at fair value
on a recurring basis within the Valuation Hierarchy is as follows:
December 31, 2010
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
(in millions)
Municipal bonds1$— $315 $— $ 315
Taxable short-term bond funds 516 — — 516
Auction rate securities — — 106 106
Foreign currency derivative contracts — (1) — (1)
Total $516 $314 $106 $ 936
December 31, 2009
Quoted Prices
in Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
(in millions)
Municipal bonds1$— $514 $— $ 514
Taxable short-term bond funds 310 — — 310
Auction rate securities — — 180 180
Foreign currency derivative contracts — (1) — (1)
Total $310 $513 $180 $1,003
1Available-for-sale municipal bonds are carried at fair value and are included in the above tables. However,
held-to-maturity municipal bonds are carried at amortized cost and excluded from the above tables.
The fair values of the Company’s available-for-sale municipal bonds are based on quoted prices for similar
assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
The fair values of the Company’s short-term bond funds are based on quoted prices for identical
investments in active markets and are therefore included in Level 1 of the Valuation Hierarchy.
The Company’s auction rate securities (“ARS”) investments have been classified within Level 3 of the
Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not
currently observable in the market due to the lack of trading in the securities. This valuation may be revised in
future periods as market conditions evolve. The Company has considered the lack of liquidity in the ARS market
and the lack of comparable, orderly transactions when estimating the fair value of its ARS portfolio. Therefore,
the Company used the income approach, which included a discounted cash flow analysis of the estimated future
cash flows adjusted by a risk premium, to estimate the fair value of its ARS portfolio. The Company estimated
the fair value of its ARS portfolio to be 10% and 15% discounts to the par value as of December 31, 2010 and
2009, respectively. When a determination is made to classify a financial instrument within Level 3, the
determination is based upon the significance of the unobservable inputs to the overall fair value measurement.
However, the fair value determination for Level 3 financial instruments may include observable components.
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