Yahoo 2004 Annual Report Download - page 52

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes, foreign currency fluctuations, and changes in the market values of
our investments.
Interest Rate Risk. Our exposure to market rate risk for changes in interest rates relates primarily to our investment
portfolio. We invest excess cash in marketable debt instruments of the U.S. Government and its agencies, and in
high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and
preserve invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities
may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates. As of December 31, 2004 and 2003 we
had investments in debt securities with effective maturities between three months and one year of approximately $1.9 bil-
lion and $894 million, respectively. Such investments had a weighted-average yield of approximately 2.37 percent and
1.92 percent, respectively. As of December 31, 2004 and 2003 we had investments in debt securities with effective
maturities between one and five years of approximately $1.0 billion and $1.3 billion respectively. Such investments had a
weighted average yield of approximately 2.98 percent and 2.37 percent, respectively. A hypothetical 100 basis point
increase in interest rates would result in an approximate $25 million decrease (approximately one percent) in the fair
value of our available-for-sale securities as of December 31, 2004 and 2003.
The fair market value of the zero coupon senior convertible notes (the ‘‘Notes’’) is subject to interest rate risk and market
risk due to the convertible feature of the Notes. Generally the fair market value of fixed interest rate debt will increase as
interest rates fall and decrease as interest rates rise. The fair market value of the Notes will also increase as the market
price of the Yahoo! stock increases and decrease as the market price falls. The interest and market value changes affect the
fair market value of the Notes but do not impact our financial position, cash flows or results of operations. As of
December 31, 2004 and 2003, the fair value of the Notes was approximately $1.4 billion and $966 million, respectively
based on quoted market prices.
Foreign Currency Risk. International revenues accounted for approximately 26 percent of total revenues during 2004 as
compared to 17 percent during 2003. The growth in our international operations has increased our exposure to foreign
currency fluctuations. Revenues and related expenses generated from our international subsidiaries are generally denomi-
nated in the functional currencies of the local countries. Primary currencies include Euros, British Pounds, Japanese Yen,
Korean Won and Australian Dollars. The income statements of our international operations are translated into U.S.
dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign
currencies, the translation of these foreign currency denominated transactions results in increased revenues, operating
expenses and net income for our International segment. Similarly, our revenues, operating expenses and net income will
decrease for our International segment when the U.S. dollar strengthens against foreign currencies.
During 2004, the U.S. dollar weakened against the Euro and other foreign currencies as compared to 2003. Using the
average foreign currency exchange rates from 2003, our international revenues for 2004 would have been lower than we
reported using the actual exchange rates for 2004, by approximately $59 million and our international segment operating
income before depreciation and amortization would have been lower by approximately $10 million.
We are also exposed to foreign exchange rates fluctuations as we convert the financial statements of our foreign subsidiar-
ies into U.S. dollars in consolidation. When there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a
component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in
currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets
46