Freddie Mac 2004 Annual Report Download - page 125

‚ PMVS-L shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our
after-tax fair value of net assets attributable to common stockholders (measured as fair value of net
assets less the fair value of preferred stock) from an immediate adverse 50 basis point parallel shift in
the level of LIBOR rates (that is, when the yield at each point on the LIBOR yield curve increases or
decreases by 50 basis points). We believe the use of an immediate 50 basis point shift in the LIBOR
yield curve is a conservative estimate of interest-rate risk. The periodic disclosure in our Monthly
Volume Summary report, which is available on our website at www.FreddieMac.com, reÖects the
average of the daily PMVS-L estimates for a given reporting period (a month, quarter or year). (We
are providing this Internet address solely for the information of interested persons. We do not intend
this Internet address to be an active link and are not using references to this Internet address here or
elsewhere in this Information Statement to incorporate additional information into this Information
Statement.)
‚ PMVS-YC shows the estimated loss in pre-tax portfolio market value, expressed as a percentage of our
after-tax fair value of net assets attributable to common stockholders, from an immediate adverse
25 basis point change in the slope (up and down) of the LIBOR yield curve. The 25 basis point change
in slope for the PMVS-YC measure is obtained by shifting the two-year and ten-year LIBOR rates by
an equal amount (12.5 basis points), but in opposite directions. LIBOR rate shifts between the two-
year and ten-year points are interpolated. The periodic disclosure in our Monthly Volume Summary
report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily
PMVS-YC estimates for a given reporting period (a month, quarter or year).
‚ Duration gap estimates the net sensitivity of the fair value of our Ñnancial instruments to movements in
interest rates. Duration gap is presented in units expressed as months. On a daily basis, we estimate the
fair value and eÅective duration of our Ñnancial assets and liabilities, including derivatives. The fair
value of each instrument is multiplied by its duration to determine the instrument's duration dollars.
Duration dollars are then aggregated to estimate the portfolio's net duration dollar exposure. To
calculate duration gap, the net duration dollar exposure is divided by the fair value of total interest-
earning assets and expressed in months. A duration gap of zero implies that the change in value of
assets from an instantaneous rate move will be accompanied by an equal and oÅsetting move in the
value of debt and derivatives thus leaving the net fair value of equity unchanged. However, because
duration does not capture convexity exposure (the amount by which duration itself changes as rates
move), actual changes in fair value from interest-rate changes may diÅer from those implied by
duration gap alone. For that reason, management believes duration gap is most useful when used in
conjunction with PMVS. The periodic duration gap disclosure in our Monthly Volume Summary
report, which is available on our website at www.FreddieMac.com, reÖects the average of the daily
duration gap estimates for a given reporting period (a month, quarter or year).
In measuring the expected loss in portfolio market value, which is the numerator in the fraction used to
calculate the PMVS percentages, we estimate the sensitivity to changes in interest rates of the fair value of all
interest-earning assets and interest-bearing liabilities, including short-term interest-earning assets and interest-
bearing liabilities and all derivatives on a pre-tax basis. When we calculate the expected loss in portfolio
market value and duration gap, we also take into account the cash Öows related to certain credit guarantee-
related items, including net buy-ups and expected gains or losses due to net interest from security program
cycles. In calculating the expected loss in portfolio market value and duration gap, we do not consider the
sensitivity to interest-rate changes of the following assets and liabilities:
‚Guarantee fee portfolio. Except for the guarantee-related items mentioned above (i.e., net buy-ups
and net interest from security program cycles), the sensitivity of the fair value of the guarantee fee
portfolio to changes in interest rates is not included in calculating the expected loss in portfolio market
value or duration gap because we believe the expected beneÑts from replacement business provide an
adequate hedge against interest-rate changes.
‚Other assets with minimal interest-rate sensitivity. Other assets, primarily including non-Ñnancial
instruments such as Ñxed assets and REO, are not included in the calculation of the expected loss in
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