Fannie Mae 2006 Annual Report Download - page 161

interest rate scenarios. A positive duration gap signals a greater exposure to rising interest rates because it
indicates that the duration of our assets exceeds the duration of our liabilities.
Our effective duration gap, which we report on a monthly basis in our Monthly Summary Report, reflects the
estimate used contemporaneously by management as of the reported date to manage the interest rate risk of
our portfolio. Our effective duration gap calculation includes the same assets and liabilities that we include in
calculating the above interest rate level and slope fair value sensitivity measures. We seek to keep our assets
and liabilities matched within a duration tolerance of plus or minus six months. When interest rates are
volatile, we often need to lengthen or shorten the average duration of our liabilities to keep them closely
matched with our mortgage durations, which change as expected mortgage prepayments change.
Beginning with June 2007 and for future months, we prospectively changed the methodology we use to
calculate our monthly effective duration gap. The revised calculation reflects the difference between the
proportional fair value weightings of our assets and liabilities. In prior months, the duration gap was not
calculated on a weighted basis and was simply the daily average of the difference between the duration of our
assets and the duration of our liabilities. Our revised methodology presents our effective duration gap on a
basis that is consistent with the fair value sensitivity measures of changes in the level and slope of the yield
curve discussed above. Based on the revised methodology, our duration gap was plus 1 month for the month
of June 2007. Under the previous methodology, our duration gap for June 2007 would have measured minus
1 month, or approximately 2 months less than the effective duration gap under the revised methodology. Our
monthly duration gap, based on our previous methodology, did not exceed plus or minus one month from
October 2004 through June 2007.
Fair Value Sensitivity of Net Assets
Table 45 discloses the estimated fair value of our net assets as of December 31, 2006 and 2005, 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 within a 12-month period. 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.”
Table 45: Interest Rate Sensitivity of Fair Value of Net Assets
Carrying
Value
Estimated
Fair Value $ % $ %
⫺50 Basis Points +100 Basis Points
Effect on Estimated Fair Value
As of December 31, 2006
(6)
(Dollars in
millions)
Trading financial instruments
(1)
. . . . . . . . . . . . . . . . . $ 11,514 $ 11,514 $ 210 1.82% $ (499) (4.33)%
Non-trading mortgage assets and consolidated debt
(2)
. . 777,084 774,012 9,515 1.23 (23,431) (3.03)
Debt
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (759,860) (765,144) (8,351) 1.09 17,737 (2.32)
Subtotal before derivatives . . . . . . . . . . . . . . . . . . . 28,738 20,382 1,374 6.74 (6,193) (30.38)
Derivative assets and liabilities, net . . . . . . . . . . . . . . . 3,747 3,747 (1,866) (49.80) 4,130 110.22
Subtotal after derivatives . . . . . . . . . . . . . . . . . . . . 32,485 24,129 (492) (2.04) (2,063) (8.55)
Guaranty assets and guaranty obligations, net
(2)
. . . . . . (2,445) 7,593 (1,309) (17.24) 1,664 21.91
Net market sensitive assets
(2)(3)
. . . . . . . . . . . . . . . . 30,040 31,722 (1,801) (5.68) (399) (1.26)
Other non-financial assets and liabilities, net
(4)
. . . . . . . 11,466 11,179 636 5.69 146 1.31
Net assets
(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,506 $ 42,901 $(1,165) (2.72)% $ (253) (0.59)%
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