Fannie Mae 2004 Annual Report Download - page 170

Monthly Summary Report, which is available on our Web site and submitted to the SEC in a current report on
Form 8-K. Our monthly duration gap, which is presented below for the period January 1, 2002 to December 31,
2004 reflects the estimate used contemporaneously by management as of the reported date to manage the
interest rate risk of our portfolio. During 2005 and 2006, our monthly duration gap has not exceeded plus or
minus one month.
Month 2004 2003 2002
January . . . ................................................... (1) (3) 2
February . . ................................................... (1) (5) (2)
March ....................................................... 0 (2) 5
April ........................................................ 3 (2) 0
May ........................................................ 3 (5) (1)
June ........................................................ 2 (1) (4)
July ......................................................... 0 6 (9)
August ...................................................... (2) 4 (14)
September .................................................... (2) 1 (10)
October ...................................................... 0 1 (6)
November .................................................... (1) (1) 2
December .................................................... (1) (1) (5)
Convexity
Convexity reflects the degree to which the duration and price of our mortgage assets change in response to a
given change in interest rates. Because of the prepayment option that exists in mortgage assets, they tend to
exhibit negative convexity. Negative convexity refers to the tendency of fixed-rate mortgage assets to fall in
price faster in periods of rising interest rates compared to the rate at which they appreciate in periods of
falling interest rates. We use convexity measures to provide us with information on how quickly and by how
much the portfolio’s duration gap may change in different interest rate environments. Our primary strategy for
managing convexity risk is to either issue callable debt or purchase option-based derivatives.
Interest Rate Sensitivity of Net Asset Fair Value
We perform various sensitivity analyses that quantify the projected impact of changes in interest rates on our
interest rate sensitive assets and liabilities. Our analyses incorporate assumed changes in the interest rate
environment, including selected hypothetical, instantaneous shifts in both the level and slope of the yield
curve. Table 38 discloses the estimated fair value of our net assets as of December 31, 2004 and 2003, and the
impact on the estimated fair value from a hypothetical instantaneous shock in interest rates of a 50 basis points
decrease and a 100 basis points increase. We selected these interest rate changes because we believe they
reflect reasonably possible near-term outcomes. We discuss how we derive the estimated fair value of our net
assets, which serves as the base case for our sensitivity analysis, in “Supplemental Non-GAAP Information—
Fair Value Balance Sheet.”
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