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Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model. The assumptions used in
preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market ("liquidity discount margin") for an
estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC
acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of
liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 1% at December 31, 2009 versus 5% at
December 31, 2008 as credit spreads on AA-rated banks have significantly improved over the past year.
The following table provides a summary of changes in fair value of our Level 3 financial assets for the years ended December 31, 2009 and 2008 (in
thousands):
2009 2008
Beginning balance $ 199,169 $ —
Transfers in from Level 1 — 288,500
Transfers in from acquisitions 30,648 —
Sales (7,248) (58,283)
Decrease (increase) in previously recognized unrealized losses included in other comprehensive income (loss) 11,883 (31,048)
Balance at December 31 $ 234,452 $ 199,169
Unrealized losses on investments at December 31, 2009 and 2008 by investment category and length of time the investment has been in a continuous
unrealized loss position are as follows (tables in thousands):
December 31, 2009 Less Than 12 Months 12 Months or Greater Total
Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses
U.S. government and agency obligations $ 490,483 $ (2,938) $ 1,363 $ (44) $ 491,846 $ (2,982)
U.S. corporate debt securities 139,571 (1,075) 3,012 (161) 142,583 (1,236)
Asset and mortgage-backed securities 5 (1) — — 5 (1)
Municipal obligations 46,618 (118) — — 46,618 (118)
Auction rate securities — — 234,452 (19,165) 234,452 (19,165)
Foreign debt securities 144,761 (538) — — 144,761 (538)
Total $ 821,438 $ (4,670) $ 238,827 $ (19,370) $ 1,060,265 $ (24,040)
December 31, 2008 Less Than 12 Months 12 Months or Greater Total
Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses Fair Value
Gross
Unrealized
Losses
U.S. government and agency obligations $ 42,663 $ (247) $ 174 $ (3) $ 42,837 $ (250)
U.S. corporate debt securities 104,280 (12,081) 4,541 (89) 108,821 (12,170)
Asset and mortgage-backed securities 133,675 (28,490) 18,187 (12,901) 151,862 (41,391)
Municipal obligations 214,900 (3,622) 16,528 (170) 231,428 (3,792)
Auction rate securities 199,169 (31,048) — — 199,169 (31,048)
Foreign debt securities 21,344 (922) — — 21,344 (922)
Total $ 716,031 $ (76,410) $ 39,430 $ (13,163) $ 755,461 $ (89,573)
Investment Losses
For all of our securities where the amortized cost basis was greater than the fair value at December 31, 2009, we have concluded that currently we
neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the
determination as to whether the unrealized loss is other-than-temporary, we
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