Fair Value of Financial Assets and Liabilities

Our fixed income and equity investments are classified as available for sale and recorded at their fair market values. We determine fair value using the following hierarchy:


•	Level 1 – Quoted prices in active markets for identical assets or liabilities.


•	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


•	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. In addition, our strategic investments held at cost are classified as Level 3. At September 30, 2012, the vast majority of our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security’s market value, including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair market value.

In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly traded equity securities are classified as long-term investments and our strategic investments held at cost are classified as other assets. As a result of the lack of liquidity for auction rate securities, we have classified these as long-term investments as of September 30, 2012 and December 31, 2011. At September 30, 2012 and December 31, 2011, all of our short- and long-term investments, excluding auction rate securities, were recognized at fair value, which was determined based upon observable inputs from our pricing vendors for identical or similar assets. At September 30, 2012 and December 31, 2011, auction rate securities were valued using a discounted cash flow model.

The following tables summarize the composition of our short- and long-term investments at September 30, 2012 and December 31, 2011 (tables in thousands):



	September 30, 2012
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Aggregate Fair Value
U.S. government and agency obligations	$	2,033,500	$	11,321	$	(1,005	)	$	2,043,816
U.S. corporate debt securities	1,360,511		12,772		(97		)	1,373,186
High yield corporate debt securities	468,285		31,408		(1,076		)	498,617
Asset-backed securities	3,227		8		—			3,235
Municipal obligations	1,023,504		4,379		(366		)	1,027,517
Auction rate securities	80,706		—		(5,860		)	74,846
Foreign debt securities	1,243,175		10,013		(198		)	1,252,990
Total fixed income securities	6,212,908		69,901		(8,602		)	6,274,207
Publicly traded equity securities	47,786		97,815		(625		)	144,976
Total	$	6,260,694	$	167,716	$	(9,227	)	$	6,419,183

We held approximately $1.3 billion in foreign debt securities at September 30, 2012. These securities have an average credit rating of A+, and approximately 5% of these securities are deemed sovereign debt with an average credit rating of AA. None of the securities deemed sovereign debt are from Greece, Italy, Ireland, Portugal or Spain. Additionally, we have an immaterial amount of exposure to French agencies and financial institutions.



	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized (Losses)			Aggregate Fair Value
U.S. government and agency obligations	$	2,474,029	$	12,420	$	(1,488	)	$	2,484,961
U.S. corporate debt securities	1,400,373		9,953		(2,573		)	1,407,753
High yield corporate debt securities	442,723		12,498		(7,742		)	447,479
Asset-backed securities	29,101		72		(25		)	29,148
Municipal obligations	814,657		2,021		(597		)	816,081
Auction rate securities	82,900		—		(8,304		)	74,596
Foreign debt securities	984,696		5,185		(2,807		)	987,074
Total fixed income securities	6,228,479		42,149		(23,536		)	6,247,092
Publicly traded equity securities	58,199		6,802		—			65,001
Total	$	6,286,678	$	48,951	$	(23,536	)	$	6,312,093

The following table represents our fair value hierarchy for our financial assets and liabilities measured at fair value as of September 30, 2012 (in thousands):



	Level 1		Level 2			Level 3		Total
Cash	$	1,441,347	$	—		$	—	$	1,441,347
Cash equivalents	2,715,470		4,000			—		2,719,470
U.S. government and agency obligations	1,128,224		915,592			—		2,043,816
U.S. corporate debt securities	—		1,373,186			—		1,373,186
High yield corporate debt securities	—		498,617			—		498,617
Asset-backed securities	—		3,235			—		3,235
Municipal obligations	—		1,027,517			—		1,027,517
Auction rate securities	—		—			74,846		74,846
Foreign debt securities	—		1,252,990			—		1,252,990
Publicly traded equity securities	144,976		—			—		144,976
Total cash and investments	$	5,430,017	$	5,075,137		$	74,846	$	10,580,000
Other items:
Strategic investments held at cost	$	—	$	—		$	254,338	$	254,338
Convertible debt	—		(2,938,101		)	—		(2,938,101		)
Foreign exchange derivative assets	—		47,311			—		47,311
Foreign exchange derivative liabilities	—		(23,426		)	—		(23,426		)
Commodity derivative liabilities	—		(1,502		)	—		(1,502		)

Our auction rate securities are predominantly rated investment grade and are primarily collateralized by student loans. The underlying loans of all but two of our auction rate securities, with a market value of $16.6 million, have partial guarantees by the U.S. government as part of the Federal Family Education Loan Program (“FFELP”) through the U.S. Department of Education. FFELP guarantees at least 95% of the loans which collateralize the auction rate securities. We believe the quality of the collateral underlying most of our auction rate securities will enable us to recover our principal balance.

To determine the estimated fair value of our investment in auction rate securities, we used a discounted cash flow model using a five year time horizon. As of September 30, 2012, the coupon rates used ranged from 0% to 4% and the discount rate was 1%, which rate represents the rate at which similar FFELP backed securities with a five year time horizon outside of the auction rate securities market were trading at September 30, 2012. The assumptions used in preparing the discounted cash flow model include an incremental discount rate for the lack of liquidity in the market (“liquidity discount margin”) for an estimated period of time. The discount rate we selected was based on AA-rated banks as the majority of our portfolio is invested in student loans where EMC acts as a financier to these lenders. The liquidity discount margin represents an estimate of the additional return an investor would require for the lack of liquidity of these securities over an estimated five-year holding period. The rate used for the discount margin was 1% at September 30, 2012 compared to 2% at December 31, 2011 due to the narrowing of credit spreads on AA-rated banks during 2012.

The following table provides a summary of changes in fair value of our Level 3 auction rate securities for the three and nine months ended September 30, 2012 (table in thousands):



	For the Three Months Ended					For the Nine Months Ended
	September 30, 2012		September 30, 2011			September 30, 2012			September 30, 2011
Balance, beginning of the period	$	73,896	$	99,154		$	74,596		$	146,044
Calls at par value	—		(13,100		)	(225		)	(64,600		)
Other-than-temporary impairment loss	—		—			(1,969		)	—
(Increase) decrease in previously recognized unrealized losses included in other comprehensive income	950		(4,963		)	2,444			(353		)
Balance, end of the period	$	74,846	$	81,091		$	74,846		$	81,091

Significant changes in the unobservable inputs discussed above could result in a significantly lower or higher fair value measurement. Generally, an increase in the discount rate, liquidity discount margin or coupon rate results in a decrease in our fair value measurement and a decrease in the discount rate, liquidity discount margin or coupon rate results in an increase in our fair value measurement.

We perform a fair value calculation of our strategic investments held at cost on a quarterly basis using the most currently available information. To determine the estimated fair value of private strategic investments held at cost we use a combination of several valuation techniques including discounted cash flow models, acquisition comparables and trading comparables. In addition, we evaluate the impact of pre- and post-money valuations of recent financing events and the impact of those on our fully diluted ownership percentages, and we consider any available information regarding the issuer’s historical and forecasted performance as well as market comparables and conditions. The fair value of these investments is considered in our review for impairment if any events and changes in circumstances occur that might have a significant adverse effect on their value.

Investment Losses

Unrealized losses on investments at September 30, 2012 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (table in thousands):



	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government and agency obligations	$	247,834	$	(906	)	$	9,186	$	(99	)	$	257,020	$	(1,005	)
U.S. corporate debt securities	96,205		(91		)	2,234		(6		)	98,439		(97		)
High yield corporate debt securities	30,208		(697		)	1,354		(379		)	31,562		(1,076		)
Municipal obligations	192,338		(362		)	2,614		(4		)	194,952		(366		)
Auction rate securities	—		—			74,846		(5,860		)	74,846		(5,860		)
Foreign debt securities	98,849		(198		)	—		—			98,849		(198		)
Publicly traded equity securities	1,097		(625		)	—		—			1,097		(625		)
Total	$	666,531	$	(2,879	)	$	90,234	$	(6,348	)	$	756,765	$	(9,227	)

For all of our securities for which the amortized cost basis was greater than the fair value at September 30, 2012, we have concluded that currently we neither plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating, the underlying value and performance of the collateral, third party guarantees and the time to maturity.

Contractual Maturities

The contractual maturities of fixed income securities held at September 30, 2012 are as follows (table in thousands):



	September 30, 2012
	Amortized Cost Basis		Aggregate Fair Value
Due within one year	$	1,271,478	$	1,275,151
Due after 1 year through 5 years	4,083,712		4,118,038
Due after 5 years through 10 years	463,518		488,630
Due after 10 years	394,200		392,388
Total	$	6,212,908	$	6,274,207

Short-term investments on the consolidated balance sheet include a $9.7 million variable rate note which has a contractual maturity in 2014, and is not classified within investments due within one year above.