Sallie Mae 2006 Annual Report Download - page 104

Managed Basis
Frequency of
Variable
Resets Assets Funding
(1)
Funding
Gap
Index
(Dollars in billions)
3 month Commercial paper ................... daily $101.1 $ 10.4 $ 90.7
3 month Treasury bill ....................... weekly 13.9 12.5 1.4
Prime ................................... annual 1.0 — 1.0
Prime ................................... quarterly 7.4 5.5 1.9
Prime ................................... monthly 13.9 12.8 1.1
PLUS Index .............................. annual 3.5 5.5 (2.0)
3-month LIBOR ........................... daily — 84.7 (84.7)
3-month LIBOR ........................... quarterly 1.5 10.5 (9.0)
1-month LIBOR ........................... monthly .1 2.0 (1.9)
Non Discrete reset
(2)
........................ monthly — 9.9 (9.9)
Non Discrete reset
(3)
........................ daily/weekly 11.1 .2 10.9
Fixed Rate
(4)
.............................. 10.2 9.7 .5
Total .................................... $163.7 $163.7 $ —
(1)
Includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage
our interest rate exposure.
(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, other liabilities and stockholders’ equity (excluding Series B Preferred Stock).
To the extent possible, we generally fund our assets with debt (in combination with derivatives) that has
the same underlying index (index type and index reset frequency). When it is more economical, we also fund
our assets with debt that has a different index and/or reset frequency than the asset, but only in instances
where we believe there is a high degree of correlation between the interest rate movement of the two indices.
For example, we use daily reset 3-month LIBOR to fund a large portion of our daily reset 3-month
commercial paper indexed assets. In addition, we use quarterly reset 3-month LIBOR to fund a portion of our
quarterly reset Prime rate indexed Private Education Loans. We also use our monthly Non Discrete reset
funding (asset-backed commercial paper program and auction rate securities) to fund various asset types. In
using different index types and different index reset frequencies to fund our assets, we are exposed to interest
rate risk in the form of basis risk and repricing risk, which is the risk that the different indices that may reset
at different frequencies will not move in the same direction or at the same magnitude. We believe that this risk
is low as all of these indices are short-term with rate movements that are highly correlated over a long period
of time. We use interest rate swaps and other derivatives to achieve our risk management objectives.
When compared with the GAAP presentation, the Managed basis presentation includes all of our off-
balance sheet assets and funding, and also includes basis swaps that primarily convert quarterly 3-month
LIBOR to other indices that are more correlated to our asset indices.
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