Fannie Mae 2012 Annual Report Download - page 162

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management makes judgments about the appropriateness of the risk assessments and will make adjustments as necessary to
properly assess our interest rate exposure and manage our interest rate risk. The methodologies used to calculate risk
estimates are periodically changed on a prospective basis to reflect improvements in the underlying estimation process.
Interest Rate Sensitivity to Changes in Interest Rate Level and Slope of Yield Curve
As part of our disclosure commitments with FHFA, we disclose on a monthly basis the estimated adverse impact on the fair
value of our net portfolio that would result from the following hypothetical situations:
• A 50 basis point shift in interest rates.
• A 25 basis point change in the slope of the yield curve.
In measuring the estimated impact of changes in the level of interest rates, we assume a parallel shift in all maturities of the
U.S. LIBOR interest rate swap curve.
In measuring the estimated impact of changes in the slope of the yield curve, we assume a constant 7-year rate and a shift of
16.7 basis points for the 1-year rate and 8.3 basis points for the 30-year rate. We believe the aforementioned interest rate
shocks for our monthly disclosures represent moderate movements in interest rates over a one-month period.
Duration Gap
Duration gap measures the price sensitivity of our assets and liabilities to changes in interest rates by quantifying the
difference between the estimated durations of our assets and liabilities. Our duration gap analysis reflects the extent to which
the estimated maturity and repricing cash flows for our assets are matched, on average, over time and across interest rate
scenarios to the estimated cash flows of our liabilities. A positive duration gap indicates that the duration of our assets
exceeds the duration of our liabilities. We disclose duration gap on a monthly basis under the caption “Interest Rate Risk
Disclosures” in our Monthly Summary, which is available on our website and announced in a press release.
While our goal is to reduce the price sensitivity of our net portfolio to movements in interest rates, various factors can
contribute to a duration gap that is either positive or negative. For example, changes in the market environment can increase
or decrease the price sensitivity of our mortgage assets relative to our liabilities because of prepayment uncertainty associated
with our assets. In a declining interest rate environment, prepayment rates tend to accelerate, thereby shortening the duration
and average life of the fixed rate mortgage assets we hold in portfolio. Conversely, when interest rates increase, prepayment
rates generally slow, which extends the duration and average life of our mortgage assets. Our debt and derivative instrument
positions are used to manage the interest rate sensitivity of our mortgage assets. As a result, the degree to which the interest
rate sensitivity of our assets is offset will be dependent upon, among other factors, the mix of funding and other derivative
instruments we use at any given point in time.
The sensitivity measures presented in Table 64, which we disclose on a quarterly basis as part of our disclosure commitments
with FHFA, are an extension of our monthly sensitivity measures. There are three primary differences between our monthly
sensitivity disclosure and the quarterly sensitivity disclosure presented below: (1) the quarterly disclosure is expanded to
include the sensitivity results for larger rate level shocks of plus or minus 100 basis points; (2) the monthly disclosure reflects
the estimated pre-tax impact on the market value of our net portfolio calculated based on a daily average, while the quarterly
disclosure reflects the estimated pre-tax impact calculated based on the estimated financial position of our net portfolio and
the market environment as of the last business day of the quarter; and (3) the monthly disclosure shows the most adverse pre-
tax impact on the market value of our net portfolio from the hypothetical interest rate shocks, while the quarterly disclosure
includes the estimated pre-tax impact of both up and down interest rate shocks.