Sallie Mae 2005 Annual Report Download - page 107

97
Interest Rate Risk Management
Asset and Liability Funding Gap
The tables below present our assets and liabilities (funding) arranged by underlying indices as of
December 31, 2005. In the following GAAP presentation, the funding gap only includes derivatives that
qualify as effective SFAS No. 133 hedges (those derivatives which are reflected in net interest margin, as
opposed to in the derivative market value adjustment). The difference between the asset and the funding is
the funding gap for the specified index. This represents our exposure to interest rate risk in the form of
basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or
may not move in the same direction or at the same magnitude.
Management analyzes interest rate risk on a Managed basis, which consists of both on-balance sheet
and off-balance sheet assets and liabilities and includes all derivatives that are economically hedging our
debt whether they qualify as effective hedges under SFAS No. 133 or not. Accordingly, we are also
presenting the asset and liability funding gap on a Managed basis in the table that follows the GAAP
presentation.
GAAP Basis
Index
(Dollars in billions)
Frequency of Variable
Resets Assets Funding(1) Funding Gap
3 month Commercial paper ..... daily $62.0 $ — $ 62.0
3 month Treasurybill........... weekly 9.0 .3 8.7
Prime ........................ annual 1.0 — 1.0
Prime ........................ quarterly 1.2 — 1.2
Prime ........................ monthly 5.6 — 5.6
PLUSIndex................... annual 2.6 — 2.6
3-monthLIBOR............... daily — — —
3-monthLIBOR............... quarterly 1.6 77.0 (75.4 )
1-monthLIBOR............... monthly 0.1 2.5 (2.4 )
CMT/CPIindex................ monthly/quarterly — 2.0 (2.0 )
Non Discreet reset(2) ........... monthly — 7.9 (7.9 )
Non Discreet reset(3) ........... daily/weekly 5.9 — 5.9
Fixed Rate(4) .................. 10.3 9.6 0.7
Total......................... $ 99.3 $ 99.3 $ —
(1) Includes all derivatives that qualify as hedges under SFAS No. 133.
(2) Consists of asset-backed commercial paper and auction rate securities, which are discount note type
instruments that generally roll over monthly.
(3) Includes restricted and non-restricted cash equivalents and other overnight type instruments.
(4) Includes receivables/payables, other assets (including Retained Interest), other liabilities and
stockholders’ equity (excluding Series B Preferred Stock).
The funding gaps in the above table are primarily interest rate mismatches in short-term indices
between our assets and liabilities. We address this issue primarily through the use of basis swaps that
primarily convert quarterly 3-month LIBOR to other indices that are more correlated to our asset indices.
These basis swaps do not qualify as effective hedges under SFAS No. 133 and as a result the effect on the
funding index is not included in our interest margin and is therefore excluded from the GAAP
presentation.