Apple 1999 Annual Report Download - page 48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST RATE DERIVATIVES AND FOREIGN CURRENCY INSTRUMENTS
The following table shows the notional principal, fair value, and credit risk amounts of the Company's interest rate derivative and foreign
currency instruments as of September 25, 1999 and 1998 (in millions).
The notional principal amounts for off-balance-sheet instruments provide one measure of the transaction volume outstanding as of year-end,
and do not represent the amount of the Company's exposure to credit or market loss. The credit risk amount shown in the table above represents
the Company's gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of
the contract, based on then-current currency exchange and interest rates at each respective date. The Company's exposure to credit loss and
market risk will vary over time as a function of interest rates and currency exchange rates.
The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of
September 25, 1999 and 1998. In certain instances where judgment is required in estimating fair value, price quotes were obtained from several
of the Company's counterparty financial institutions. Although the table above reflects the notional principal, fair value, and credit risk amounts
of the Company's interest rate and foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and
transactions that the interest rate and foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of
these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the
remaining life of the instruments.
The interest rate swaps, which qualify as accounting hedges, generally require the Company to pay a floating interest rate based on the three-
or
six-month U.S. dollar LIBOR and receive a fixed rate of interest without exchanges of the underlying notional amounts. These swaps
effectively convert the Company's fixed-rate 10 year debt to floating-rate debt and convert the floating rate investments to fixed rate. The
maturity date for $25 million of the asset swaps is October 1999 with the remaining debt and asset swaps maturing in February and September
of 2001. As of September 25, 1999 and 1998, interest rate debt swaps had a weighted-average receive rate of 6.04%. The weighted-
average pay
rate on the debt swaps was 5.45% and 5.73% as of September 25, 1999 and 1998, respectively. As of September 25, 1999, interest rate asset
swaps had a weighted-average receive rate of 5.53% and a weighted-
average pay rate of 5.24%. The unrealized gains and losses on these swaps
are deferred and recognized in income as a
44
SEPTEMBER 25, 1999 SEPTEMBER 25, 1998
---------------------------------- ----------------------------------
NOTIONAL FAIR CREDIT RISK NOTIONAL FAIR CREDIT RISK
PRINCIPAL VALUE AMOUNTS PRINCIPAL VALUE AMOUNTS
--------- -------- ----------- --------- -------- -----------
Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps....................................... $ 790 $ (5) $ -- $ 340 $ 7 $ 1
Purchased floors............................ $ -- $ -- $ -- $ 525 $ 1 $ 1
Foreign exchange instruments:
Spot/Forward contracts...................... $ 730 $ (8) $ 4 $ 295 $ (8) $ --
Purchased options........................... $1,305 $ 4 $ -- $1,045 $ 14 $ 14
Transactions other than accounting hedges:
Foreign exchange instruments:
Spot/Forward contracts...................... $ 185 $ (1) $ -- $ -- $ -- $ --
Purchased options........................... $ 645 $ 8 $ 8 $ 835 $ 8 $ 8
Sold options................................ $ 585 $(17) $ -- $ 880 $(15) $ --