First Data 2008 Annual Report Download - page 94

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
estimated the fair value of the instruments based on a probability weighted discounted cash flow analysis. The Company considered each security's key terms
including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum auction rate, as well as underlying collateral, ratings, and
guarantees or insurance. Substantially all SLARS held by the Company have collateral backed by FFELP. The probabilities of auction failure, a successful
auction at par or repurchase at par for each future period were then forecasted. The Company assumed that the issuers will continue to pay maximum auction
rate on the securities until the event of a successful auction or repurchase, at which point the Company would sell the SLARS at par through the auction. To
determine the fair value of each security, the weighted average cash flows for each period were discounted back to present value at the determined discount
rate for each security. As of December 31, 2008, cumulative probabilities of successfully passing auction have been estimated at approximately 35% through
year two, and 80% in year five. The discount rates used in the valuation were a combination of the liquidity risk premium assigned to the security (which
ranged from 5% to 6%) plus the treasury strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being discounted. A 1
percentage point change in the discount rate would change the fair value of the SLARS by approximately $17 million.
As of December 31, 2008, the Company also held certain investments in primarily short-term debt securities, including discounted commercial paper,
money market funds, certificates of deposit (both domestic and Yankee), and fixed rate corporate bonds. Many of these securities are considered cash
equivalents. Prices for these securities are not quoted on active exchanges but are priced through an independent third party pricing service based on
quotations from market-makers in the specific instruments or, where appropriate, other market inputs including interest rates, benchmark yields, reported
trades, issuer spreads, two sided markets, benchmark securities, bids, offers, and reference data. In certain instances, amortized cost is considered an
appropriate approximation of market value. Other investments are valued based upon either quoted prices from active exchanges or available third-party
broker quotes.
Changes in fair value of investments securities are recorded through the "Other comprehensive income" component of stockholder's equity with the
exception of investment partnerships which are recorded through "Investment income" in the Consolidated Statements of Operations. Regardless of
investment type, declines in the fair value of the investments are reviewed to determine whether they are other than temporary in nature. Declines in value that
are judged to be other than temporary in nature are recognized in the Consolidated Statements of Operations. Absent any other indications of a decline in
value being temporary in nature, the Company's policy is to treat a decline in an investment's quoted market price that has lasted for more than six months as
an other than temporary decline in value, with regard to debt securities, unless the Company has both the ability and intent to hold them to maturity or
recovery to its cost basis. Other indications of a decline in value could include credit issues, adverse economic conditions or an inability to hold the
investment until a recovery in value occurs.
Derivative Financial Instruments
The Company uses derivative financial instruments to enhance its ability to manage its exposure to certain financial and market risks, primarily those
related to changes in interest rates and foreign currency exchange rates. Interest rate swaps are entered into to manage interest rate risk associated with the
Company's variable-rate borrowings. Cross currency swaps for various foreign currencies are entered into to manage foreign currency exchange risk
associated with the Company's initial investments in certain foreign subsidiaries or certain intercompany loans to foreign subsidiaries. Forward contracts on
various foreign currencies are entered into to manage foreign currency exchange risk associated with the Company's forecasted foreign currency denominated
sales or purchases. The Company's policy is to minimize its cash flow and net investment exposures related to
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