Sallie Mae 2010 Annual Report Download - page 224

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The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolida-
tion Loan (with a commercial paper-based SAP spread of 2.64 percent):
Fixed Borrower Rate ...................................................... 7.25%
SAP Spread over Commercial Paper Rate ....................................... (2.64)%
Floor Strike Rate
(1)
....................................................... 4.61%
(1) The interest rate at which the underlying index (Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed
borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate.
Based on this example, if the quarterly average commercial paper rate is over 4.61 percent, the holder of
the student loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread
to commercial paper of 2.64 percent. On the other hand, if the quarterly average commercial paper rate is
below 4.61 percent, the SAP formula will produce a rate below the fixed borrower rate of 7.25 percent and
the loan holder earns at the borrower rate of 7.25 percent.
Graphic Depiction of Floor Income:
4.00% 5.00% 6.00% 7.00%
Commercial Paper Rate
Floor Strike Rate @ 4.61%
Lender Yield
Floor Income
Fixed Borrower Rate = 7.25%
Special Allowance Payment (SAP) Rate = 2.64%
Floating Debt Rate
Fixed Borrower Rate
Y
ield
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
Floor Income Contracts — We enter into contracts with counterparties under which, in exchange for an
upfront fee representing the present value of the Floor Income that we expect to earn on a notional amount of
underlying student loans being economically hedged, we will pay the counterparties the Floor Income earned
on that notional amount over the life of the Floor Income Contract. Specifically, we agree to pay the
counterparty the difference, if positive, between the fixed borrower rate less the SAP (see definition below)
spread and the average of the applicable interest rate index on that notional amount, regardless of the actual
balance of underlying student loans, over the life of the contract. The contracts generally do not extend over
the life of the underlying student loans. This contract effectively locks in the amount of Floor Income we will
earn over the period of the contract. Floor Income Contracts are not considered effective hedges under
ASC 815, “Derivatives and Hedging,” and each quarter we must record the change in fair value of these
contracts through income.
Gross Floor Income — Floor Income earned before payments on Floor Income Contracts.
G-3