Earthlink 2009 Annual Report Download - page 63

Table of Contents
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
The Company is exposed to interest rate risk with respect to its investments in marketable securities. A change in prevailing interest rates
may cause the fair value of the Company's investments to fluctuate. For example, if the Company holds a security that was issued with a fixed
interest rate at the then-
prevailing rate and the prevailing interest rate later rises, the fair value of its investment may decline. To minimize this
risk, the Company has historically held many investments until maturity, and as a result, the Company receives interest and principal amounts
pursuant to the underlying agreements. To further mitigate risk, the Company has historically maintained its portfolio of investments in a variety
of securities, including government agency notes, asset-
backed debt securities (including auction rate debt securities) and commercial paper, all
of which bear a minimum short-term rating of A1/P1 or a minimum long-
term rating of A/A2. As of December 31, 2008 and 2009, net
unrealized losses in these investments were not material. In general, money market funds are not subject to market risk because the interest paid
on such funds fluctuates with the prevailing interest rate.
As of December 31, 2008, our investments in marketable securities consisted of $47.8 million of auction rate securities with a weighted
average interest rate of 2.0%. As of December 31, 2009, our investments in marketable securities included $42.9 million of auction rate
securities with a weighted average interest rate of 1.42%. These securities are variable-
rate debt instruments whose underlying agreements have
contractual maturities of up to 40 years. These securities are issued by various municipalities and state regulated higher education agencies and
are predominantly secured by pools of student loans guaranteed by the agencies and reinsured by the U.S. Department of Education. Liquidity
for these auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-
determined intervals,
usually every 28 days. In October 2008, we entered into an agreement with the broker that sold us our auction rate securities that gives us the
right to sell our existing auction rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012
(herein referred to as "put right"). We elected a one-time transfer of our auction rate securities from the available-for-
sale category to the trading
category. We also elected the fair value option for the put right to offset the fair value changes of the auction rate securities.
We are also exposed to interest rate risk with respect to our convertible senior notes due November 15, 2026. The fair value of our
convertible senior notes may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to
greater interest rate risk than those with shorter maturities. Our convertible senior notes bear interest at a fixed rate of 3.25% per year until
November 15, 2011, and 3.50% interest per year thereafter. As of December 31, 2008 and 2009, the principal amount of our convertible senior
notes was $258.8 million and the fair value was approximately $236.6 million and $279.8 million, respectively, which was based on the quoted
market price.
Equity Risk
We are exposed to equity price risk as it relates to changes in the market value of our equity investments. We invest in equity instruments of
public and private companies for operational and strategic purposes. These securities are subject to significant fluctuations in fair market value
due to volatility of the stock market and the industries in which the companies operate. We typically do not attempt to reduce or eliminate our
market exposure in these equity instruments.
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