Prudential 2003 Annual Report Download - page 159

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PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Investment Contracts
For guaranteed investment contracts, income annuities and other similar contracts without life contingencies,
estimated fair values are derived using discounted projected cash flows based on interest rates being offered for similar
contracts with maturities consistent with those of the contracts being valued. For individual deferred annuities and
other deposit liabilities, fair value approximates carrying value.
Debt and Guaranteed beneficial interest in Trust holding solely debentures of Parent
The estimated fair value of short-term and long-term debt and the guaranteed beneficial interest in Trust holding
solely debentures of Parent is derived by using discount rates based on the borrowing rates currently available to the
Company for debt and financial instruments with similar terms and remaining maturities.
The carrying amount approximates or equals fair value for the following instruments: fixed maturities, available
for sale, equity securities, short-term investments, cash and cash equivalents, restricted cash and securities, separate
account assets and liabilities, trading account assets, broker-dealer related receivables/payables, securities purchased
under agreements to resell, cash collateral for borrowed securities, securities sold under agreements to repurchase, cash
collateral for loaned securities, and securities sold but not yet purchased. The following table discloses the Company’s
financial instruments where the carrying amounts and estimated fair values differ at December 31,
2003 2002
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(in millions)
Fixed maturities, held to maturity .................................. $ 3,068 $ 3,084 $ 2,612 $ 2,673
Commercial loans .............................................. 19,469 21,037 19,401 21,335
Policy loans ................................................... 8,152 9,706 8,827 10,714
Mortgage securitization inventory ................................. 1,056 1,058 700 708
Investment contracts ............................................ 40,681 41,450 37,871 38,765
Short-term and long-term debt .................................... 10,349 10,844 8,226 8,804
Guaranteed beneficial interest in Trust holding solely debentures of
Parent (a) ................................................... — — 690 755
(a) Effective December 31, 2003, the Company adopted the revised guidance under FIN No. 46. As a result, the Trust was deconsolidated, and the
Prudential Financial debentures are reported as “Long-term debt.” See Note 11 for additional information.
18. DERIVATIVE INSTRUMENTS
Types of Derivative Instruments
Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches between
assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it anticipates
acquiring and other anticipated transactions and commitments. As an example, the Company may use interest rate
swaps to hedge the interest rate risk associated with the value of mortgage loans it has originated and plans to securitize
in the future. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the
difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional principal
amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either
party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master
agreements that provide for a single net payment to be made by one counterparty at each due date.
Exchange-traded futures and options are used by the Company to reduce market risks from changes in interest
rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those
Prudential Financial 2003 Annual Report 157