Bank of America 2005 Annual Report Download - page 134

BANK OF AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
In determining the pro forma disclosures in the previous table, the fair value of options granted was estimated on
the date of grant using the Black-Scholes option-pricing model and assumptions appropriate to each plan. The Black-
Scholes model was developed to estimate the fair value of traded options, which have different characteristics than
employee stock options, and changes to the subjective assumptions used in the model can result in materially different
fair value estimates. The weighted average grant date fair values of the options granted during 2005, 2004 and 2003
were based on the assumptions below. See Note 17 of the Consolidated Financial Statements for further discussion.
Shareholder Approved Plans
2005 2004 2003
Risk-free Interest Rate ................................................. 3.94% 3.36% 3.82%
Dividend Yield ........................................................ 4.60% 4.56% 4.40%
Volatility ............................................................. 20.53% 22.12% 26.57%
ExpectedLives(Years) ................................................. 657
Compensation expense under the fair value-based method is recognized over the vesting period of the related stock
options. Accordingly, the pro forma results of applying SFAS 123 in 2005, 2004 and 2003 may not be indicative of future
amounts.
Cash and Cash Equivalents
Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal
Reserve Bank are included in Cash and Cash Equivalents.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase are treated
as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold
plus accrued interest. The Corporation’s policy is to obtain the use of Securities Purchased under Agreements to Resell.
The market value of the underlying securities, which collateralize the related receivable on agreements to resell, is
monitored, including accrued interest. The Corporation may require counterparties to deposit additional collateral or
return collateral pledged, when appropriate.
Collateral
The Corporation has accepted collateral that it is permitted by contract or custom to sell or repledge. At
December 31, 2005, the fair value of this collateral was approximately $179.1 billion of which $112.5 billion was sold or
repledged. At December 31, 2004, the fair value of this collateral was approximately $152.5 billion of which $117.5
billion was sold or repledged. The primary source of this collateral is reverse repurchase agreements. The Corporation
pledges securities as collateral in transactions that consist of repurchase agreements, public and trust deposits, Treasury
tax and loan notes, and other short-term borrowings. This collateral can be sold or repledged by the counterparties to the
transactions.
In addition, the Corporation obtains collateral in connection with its derivative activities. Required collateral levels
vary depending on the credit risk rating and the type of counterparty. Generally, the Corporation accepts collateral in
the form of cash, U.S. Treasury securities and other marketable securities. Based on provisions contained in legal
netting agreements, the Corporation has netted cash collateral against the applicable derivative mark-to-market
exposures. Accordingly, the Corporation offsets its obligation to return or its right to reclaim cash collateral against the
fair value of the derivatives being collateralized.
Trading Instruments
Financial instruments utilized in trading activities are stated at fair value. Fair value is generally based on quoted
market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes, pricing models
or quoted prices for instruments with similar characteristics. Realized and unrealized gains and losses are recognized in
Trading Account Profits.
Derivatives and Hedging Activities
All derivatives are recognized on the Consolidated Balance Sheet at fair value, taking into consideration the effects
of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions
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