HR Block 2008 Annual Report Download - page 64

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Rate declines also negatively impact spreads received on customer sweep account balances. Interest rate
increases have an opposite effect on these revenues and expenses.
Our fixed-income trading portfolio is affected by changes in market rates and prices. The risk is the loss of
income arising from adverse changes in the value of the trading portfolio. We value the trading portfolio at quoted
market prices and the market value of our trading portfolio at April 30, 2008, was approximately $8.8 million, net of
$0.2 million in securities sold short. Fixed-income securities totaling $1.6 million at April 30, 2008 have returns
linked to the equity market, and are therefore discussed above in “Equity Price Risk.” See table below for
sensitivities to changes in interest rates of our other fixed-income securities. With respect to our fixed-income
securities portfolio, we manage our market price risk exposure by limiting concentration risk, maintaining
minimum credit quality and limiting inventory to anticipated retail demand and current market conditions.
DISCONTINUED OPERATIONS
RESIDUAL INTERESTS – Relative to modeling assumptions, an increase or decrease in interest rates would affect
the value of OOMC’s residual interests and could affect accretion income related to these residual interests.
Residual interests bear the interest rate risk embedded within the securitization due to an initial fixed-rate period
on the loans versus a floating rate funding cost. Residual interests also bear the ongoing risk the floating interest
rate earned after the fixed period on the mortgage loans is different from the floating interest rate on the bonds
sold in the securitization.
See table below for sensitivities to changes in interest rates for residual interests
SENSITIVITY ANALYSIS
The sensitivities of certain financial instruments to changes in interest rates as of April 30, 2008 and 2007 are
presented below. The following table represents hypothetical instantaneous and sustained parallel shifts in
interest rates and should not be relied on as an indicator of future expected results. The impact of a change in
interest rates on other factors, such as delinquency and prepayment rates, is not included in the analysis below.
Carrying Value at
April 30, 2008 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
(in 000s)
Mortgage loans held for investment $ 966,301 $ 33,382 $ 22,618 $ 14,291 $ (22,135) $ (44,639) $ (65,274)
Mortgage-backed securities 29,401 941 681 624 (165) (198) (227)
Residual interests in securitizations 16,678 20,312 13,233 6,024 (3,809) (6,104) (7,553)
Investments at captive insurance
subsidiary 9,682 1,025 728 354 (335) (652) (953)
Fixed income – trading (net) 8,755 2,769 1,676 772 (714) (1,335) (1,857)
Carrying Value at
April 30, 2007 ⫺300 ⫺200 ⫺100 +100 +200 +300
Basis Point Change
Mortgage loans held for investment $ 1,358,222 $ 39,634 $ 32,444 $ 22,129 $ (29,013) $ (60,262) $ (98,526)
Mortgage loans held for sale 222,810 13,414 8,883 4,399 (4,277) (8,207) (10,977)
Residual interests in
securitizations – available-for-sale 90,283 4,460 434 (516) 1,488 2,248 681
Residual interests in
securitizations – trading 72,691 (5,572) (3,697) (1,759) 1,277 1,865 1,676
Beneficial interest in Trusts – trading 41,057 61,977 39,922 18,411 (16,898) (32,325) (49,512)
Mortgage-backed securities 35,084 (45) (62) (35) (5) (829) (2,303)
Fixed income – trading (net) 10,924 3,003 1,763 871 (805) (1,522) (2,129)
Interest rate swaps 10,774 (169,120) (111,369) (55,007) 53,688 106,090 157,240
Investments at captive insurance
subsidiary 9,568 1,328 859 417 (394) (766) (1,118)
Put options on Eurodollar futures 1,212 (1,212) (1,211) (1,136) 5,015 13,283 21,989
44 H&R BLOCK 2008 Form 10K