Target 2009 Annual Report Download - page 45

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk results primarily from interest rate changes on our debt obligations, some of
which are at a LIBOR-plus floating rate, and on our credit card receivables, the majority of which are assessed
finance charges at a Prime-based floating rate. To manage our net interest margin, we generally maintain
levels of floating-rate debt to generate similar changes in net interest expense as finance charge revenues
fluctuate. The degree of floating asset and liability matching may vary over time and in different interest rate
environments. At January 30, 2010, the amount of floating-rate credit card assets exceeded the amount of net
floating-rate debt obligations by approximately $1 billion. As a result, based on our balance sheet position at
January 30, 2010, the annualized effect of a 0.1 percentage point decrease in floating interest rates on our
floating rate debt obligations, net of our floating rate credit card assets and marketable securities, would be to
decrease earnings before income taxes by approximately $1 million. See further description in Note 20 of the
Notes to Consolidated Financial Statements.
We record our general liability and workers’ compensation liabilities at net present value; therefore, these
liabilities fluctuate with changes in interest rates. Periodically, in certain interest rate environments, we
economically hedge a portion of our exposure to these interest rate changes by entering into interest rate
forward contracts that partially mitigate the effects of interest rate changes. Based on our balance sheet
position at January 30, 2010, the annualized effect of a 0.5 percentage point decrease in interest rates would
be to decrease earnings before income taxes by approximately $9 million.
In addition, we are exposed to market return fluctuations on our qualified defined benefit pension plans.
The annualized effect of a one percentage point decrease in the return on pension plan assets would
decrease plan assets by $22 million at January 30, 2010. The value of our pension liabilities is inversely related
to changes in interest rates. To protect against declines in interest rates we hold high-quality, long-duration
bonds and interest rate swaps in our pension plan trust. At year end, we had hedged approximately
50 percent of the interest rate exposure of our funded status.
As more fully described in Note 14 and Note 26 of the Notes to Consolidated Financial Statements, we are
exposed to market returns on accumulated team member balances in our nonqualified, unfunded deferred
compensation plans. We control the risk of offering the nonqualified plans by making investments in life
insurance contracts and prepaid forward contracts on our own common stock that offset a substantial portion
of our economic exposure to the returns on these plans. The annualized effect of a one percentage point
change in market returns on our nonqualified defined contribution plans (inclusive of the effect of the
investment vehicles used to manage our economic exposure) would not be significant.
We do not have significant direct exposure to foreign currency rates as all of our stores are located in the
United States, and the vast majority of imported merchandise is purchased in U.S. dollars.
Overall, there have been no material changes in our primary risk exposures or management of market
risks since the prior year.
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