Sallie Mae 2012 Annual Report Download - page 175

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Fair Value Measurements (Continued)
Cash and Investments (Including “Restricted Cash and Investments”)
Cash and cash equivalents are carried at cost. Carrying value approximates fair value. Investments classified
as trading or available-for-sale are carried at fair value in the financial statements. Investments in mortgage-
backed securities are valued using observable market prices. These securities are primarily collateralized by real
estate properties in Utah and are guaranteed by either a government sponsored enterprise or the U.S. government.
Other investments (primarily municipal bonds) 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. These valuations are immaterial to the overall investment portfolio. 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 to equal their cost and, when needed, adjustments for
liquidity and credit spreads are made depending on market conditions and counterparty credit risks. No additional
adjustments were deemed necessary.
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. 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. Foreign currency-denominated borrowings are re-measured at current spot rates in the
financial statements. The full fair value of all borrowings is disclosed. Fair value was determined through
standard bond pricing models and option models (when applicable) using the stated terms of the borrowings,
observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from
broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from
observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for
secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and
unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from
inactive markets.
Derivative Financial Instruments
All derivatives are accounted for at fair value in the financial statements. The fair value of a majority of
derivative financial instruments was determined by standard derivative pricing and option models using the
stated terms of the contracts and observable market inputs. In some cases, we utilized internally developed inputs
that are not observable in the market, and as such, classified these instruments as level 3 fair values. Complex
structured derivatives or derivatives that trade in less liquid markets require significant estimates and judgment in
determining fair value that cannot be corroborated with market transactions. It is our policy to compare our
derivative fair values to those received by our counterparties in order to validate the model’s outputs. Any
significant differences are identified and resolved appropriately.
When determining the fair value of derivatives, we take 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. The net
exposures for each counterparty are adjusted based on market information available for the specific counterparty,
including spreads from credit default swaps. When the counterparty has exposure to us under derivatives with us,
we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our
credit risk. While trusts that contain derivatives are not required to post collateral, when the counterparty is
exposed to the trust the credit quality and securitized nature of the trusts minimizes any adjustments for the
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