eTrade 2009 Annual Report Download - page 80

The following table outlines our fair value measurement of the non-interest-bearing convertible debentures,
including the fair value of each individual component, using the $1.35 closing stock price on August 25, 2009,
the date of consummation of the Debt Exchange (dollars in millions):
August 25, 2009
Fair Value
Fair Value as a
% of Principal
Amount
Intrinsic value of the underlying stock $2,273.2 131%
Value of 10-year put option 467.7 27%
Liquidity discount (274.1) (16)%
Fair value of convertible debentures(1) $2,466.8 142%
(1) We classified this fair value measurement as Level 3 of the fair value hierarchy as the liquidity discount represented an unobservable
input significant to the fair value measurement.
Effects if Actual Results Differ
The Debt Exchange resulted in a $968.3 million pre-tax non-cash loss on extinguishment of debt during the
third quarter of 2009. The difference between the fair value of the newly-issued non-interest-bearing convertible
debentures and the face amount of the exchanged debt resulted in a $725.0 million premium on the new debt that
represented a key component of the loss. While our methodology for determining the fair value of the
non-interest-bearing convertible debentures utilized observable inputs where available, the liquidity discount
represented an unobservable input significant to the fair value measurement. Each 1% increase in the liquidity
discount in our valuation methodology would have resulted in a 1%, or approximately $27 million, decrease in
the fair value measurement of the non-interest-bearing convertible debentures. For further details on the
accounting for the Debt Exchange see Note 1—Organization, Basis of Presentation and Summary of Significant
Accounting Policies of Item 8. Financial Statements and Supplementary Data.
Classification and Valuation of Certain Investments
Description
The classification of an investment determines its accounting treatment. We generally classify our
investments in securities as either trading or available-for-sale. We have not classified any investments as
held-to-maturity. Trading securities are carried at fair value and both unrealized and realized gains and losses are
recognized in the consolidated statement of loss. Securities classified as available-for-sale are carried at fair
value with unrealized gains and losses included in accumulated other comprehensive loss, net of tax. Declines in
fair value for available-for-sale debt securities that we believe to be other-than-temporary are included in the
consolidated statement of loss in the net impairment line item. Available-for-sale securities consist primarily of
debt securities, specifically residential mortgage-backed securities, as of December 31, 2009. As of
December 31, 2009, 70% and 29% of our available-for-sale securities were residential mortgage-backed
securities and other debt securities, respectively.
Beginning in the second quarter of 2009, our OTTI evaluation for available-for-sale debt securities reflects
the adoption of the amended OTTI accounting guidance. Under the amended OTTI accounting guidance, we
consider OTTI for an available-for-sale debt security to have occurred if one of the following conditions are met:
we intend to sell the impaired debt security; it is more likely than not that we will be required to sell the impaired
debt security before recovery of the security’s amortized cost basis; or we do not expect to recover the entire
amortized cost basis of the security. If we intend to sell an impaired available-for-sale debt security or if it is
more likely than not that we will be required to sell the impaired available-for-sale debt security before recovery
of the security’s amortized cost basis, we will recognize OTTI in earnings equal to the entire difference between
the security’s amortized cost basis and the security’s fair value. For impaired available-for-sale debt securities
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