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Quantitative and Qualitative Disclosures About Market Risk
Our financial position is exposed to a variety of risks including interest rate risk, equity price risk, and foreign currency exchange
risk.
Interest Rate Risk
Fixed Income Securities
We maintain an investment portfolio of various holdings, types, and maturities. Our primary objective for holding fixed income
securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. At any time, a
sharp rise in market interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio.
Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on
interest income for our investment portfolio. We may utilize derivative instruments designated as hedging instruments to achieve
our investment objectives. We had no outstanding hedging instruments for our fixed income securities as of July 31, 2010. Our
fixed income instruments are held for purposes other than trading. Our fixed income instruments are not leveraged as of July 31,
2010. See Note 7 to the Consolidated Financial Statements. We monitor our interest rate and credit risks, including our credit
exposures to specific rating categories and to individual issuers. We believe the overall credit quality of our portfolio is strong.
The following tables present the hypothetical fair values of our fixed income securities, including the hedging effects when
applicable, as a result of selected potential market decreases and increases in interest rates. The market changes reflect immediate
hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), plus 100 BPS, and plus 150 BPS. Due to the
low interest rate environment at the ends of each of fiscal 2010 and fiscal 2009, we did not believe a parallel of shift of minus 100
BPS or minus 150 BPS was relevant. The hypothetical fair values as of July 31, 2010 and July 25, 2009 are as follows (in millions):
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
DECREASE OF X BASIS POINTS
FAIR VALUE
AS OF
JULY 31,
2010
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
INCREASE OF X BASIS POINTS
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
Fixed income securities N/A N/A $ 34,187 $ 34,029 $ 33,870 $ 33,712 $ 33,553
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
DECREASE OF X BASIS POINTS
FAIR VALUE
AS OF
JULY 25,
2009
VALUATION OF SECURITIES
GIVEN AN INTEREST RATE
INCREASE OF X BASIS POINTS
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
Fixed income securities N/A N/A $ 28,486 $ 28,355 $ 28,224 $ 28,093 $ 27,963
There were no impairment charges on our investments in fixed income securities for fiscal 2010. For fiscal 2009 we had impairment
charges of $219 million on investments in fixed income securities, and for fiscal 2008 there were no such impairment charges.
Debt
As of July 31, 2010, we had $15.0 billion in principal amount of fixed-rate senior notes outstanding, with a carrying amount of
$15.2 billion and a fair value of $16.3 billion, which fair value is based on market prices. As of July 31, 2010, a hypothetical 50 BPS
increase or decrease in market interest rates would change the fair value of the fixed-rate debt, excluding the $1.5 billion of
hedged debt, by a decrease of approximately $500 million and an increase of approximately $650 million, respectively. However,
this hypothetical change in interest rates would not impact the interest expense on the fixed-rate debt.
Equity Price Risk
The fair value of our equity investments in publicly traded companies is subject to market price volatility. We may hold equity
securities for strategic purposes or to diversify our overall investment portfolio. Our equity portfolio consists of securities with
characteristics that most closely match the Standard & Poor’s 500 Index or NASDAQ Composite Index. These equity securities are
held for purposes other than trading. To manage our exposure to changes in the fair value of certain equity securities, we may enter
into equity derivatives designated as hedging instruments.
36 Cisco Systems, Inc.