Sallie Mae 2008 Annual Report Download - page 196

16. Fair Values of Financial Instruments (Continued)
Other Loans
Warehousing, facilities financings, and mortgage and consumer loans held for investment are accounted
for at cost with fair values being disclosed as required by SFAS No. 107. Mortgage loans held for sale are
accounted for at lower of cost or market. Fair value was determined with discounted cash flow models using
the stated terms of the loans and observable market yield curves. In addition, adjustments and assumptions
were made for credit spreads, liquidity, prepayment speeds and defaults. Significant inputs into the models are
not observable.
Cash and Investments (Including “Restricted”)
Cash and cash equivalents are carried at cost. Carrying value approximated fair value for disclosure
purposes. Investments accounted for under SFAS No. 115 and classified as trading or available-for-sale are
carried at fair value in the financial statements. Investments in U.S. Treasury securities and securities issued
by U.S. government agencies that are traded in active markets were valued using observable market prices.
Other investments for which observable prices from active markets are not available were valued through
standard bond pricing models using observable market yield curves adjusted for credit and liquidity spreads.
The fair value of investments in Commercial Paper, Asset Backed Commercial Paper, or Demand Deposits
that have a remaining term of less than 90 days when purchased are estimated at cost and when needed,
adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit
risks. These investments consist of mostly overnight/weekly maturity instruments with highly-rated
counterparties.
Short-term Borrowings and Long-term Borrowings
Borrowings are accounted for at cost in the financial statements except when denominated in a foreign
currency or when designated as the hedged item in a fair value hedge relationship under SFAS No. 133. When
the hedged risk is the benchmark interest rate and not full fair value, the cost basis is adjusted for changes in
value due to benchmark interest rates only. Additionally, foreign currency denominated borrowings are re-
measured at current spot rates in the financial statements. The full fair value of all borrowings are disclosed as
required by SFAS No. 107. Fair value was determined through standard bond pricing models and option
models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign
currency exchange rates and volatilities from active markets; or from quotes from broker-dealers. Credit
adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and
spreads on credit default swaps specific to the Company.
Derivative Financial Instruments
All derivatives are accounted for at fair value in the financial statements. The fair values of a majority of
derivative financial instruments, including swaps and floors, were determined by standard derivative pricing
and option models using the stated terms of the contracts and observable yield curves, forward foreign
currency exchange rates and volatilities from active markets. In some cases, management utilized internally
developed amortization streams to model the fair value for swaps whose notional contractually amortizes with
securitized asset balances. Complex structured derivatives or derivatives that trade in less liquid markets
require significant adjustments and judgment in determining fair value that cannot be corroborated with
market transactions. When determining the fair value of derivatives, the Company takes into account
counterparty credit risk for positions where it is exposed to the counterparty on a net basis by assessing
exposure net of collateral held. (See Note 9, “Derivative Financial Instruments — Risk Management Strategy,”
for further discussion of the Company’s derivative agreements and its policy to require legally enforceable
F-76
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts, unless otherwise stated)