Discover 2010 Annual Report Download - page 149

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Fair Value of Assets and Liabilities Held at November 30, 2010. Below are descriptions of the techniques used to
estimate the fair value of financial instruments on the Company’s statement of financial condition as of November 30,
2010.
Cash and cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the low
level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given
their short maturities.
Restricted cash. The carrying value of restricted cash approximates fair value due to the relatively liquid nature of these
assets, particularly given the short maturities of the assets in which the restricted cash is invested.
Other short-term investments. The carrying value of other short-term investments approximates fair value due to the low
level of risk these assets present to the Company as well as the relatively liquid nature of these assets, particularly given
their maturities of less than one year.
Available-for-sale investment securities. Investment securities classified as available-for-sale consist of credit card asset-
backed securities issued by other financial institutions, U.S. Treasury and government agency securities, corporate debt
securities, and, until August 2010, asset-backed commercial paper notes. The fair value for the U.S. Treasury and
government agency securities are valued using estimated fair values based on quoted market prices for the same or
similar securities. The fair value estimation techniques for the credit card asset-backed securities issued by other financial
institutions and corporate debt securities are discussed below.
Held-to-maturity investment securities. Held-to-maturity investment securities are generally valued using the estimated
fair values based on quoted market prices for the same or similar securities.
Net loan receivables. The Company’s loan receivables include credit card and installment loans to consumers and
credit card loans to businesses. To estimate the fair value of loan receivables, loans are aggregated into pools of similar
loan types, characteristics and expected repayment terms. The fair values of the loans are estimated by discounting
expected future cash flows using rates at which similar loans could be made under current market conditions.
Deposits. The carrying values of money market deposits, non-interest bearing deposits, interest-bearing demand
deposits and savings deposits approximate their fair values due to the liquid nature of these deposits. For time deposits
for which readily available market rates do not exist, fair values are estimated by discounting expected future cash flows
using market rates currently offered for deposits with similar remaining maturities.
Long-term borrowings – owed to securitization investors. Fair values of long-term borrowings owed to securitization
investors are determined utilizing quoted market prices of the same transactions.
Other long-term borrowings. Fair values of other long-term borrowings are determined utilizing current observable
market prices for those transactions, if available. If there are no observable market transactions, then fair values are
determined by discounting cash flows of future interest accruals at market rates currently offered for borrowings with
similar credit risks, remaining maturities and repricing terms.
Derivative financial instruments. The Company’s derivative financial instruments consist of interest rate swaps and
foreign currency forward contracts. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including
interest rate curves and option volatility. The fair values of interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash
payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates
(forward curves) derived from observable market interest rate curves. See Note 23: Derivatives and Hedging Activities for
more information.
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