Fair Value Measurements

Investments

(In millions)	Balance		Level 1		Level 2		Level 3
June 30, 2016
Assets:
Equity securities	$	3	$	3	$	—	$	—
Government bonds	50		—		50		—
Total assets at fair value	$	53	$	3	$	50	$	—

December 31, 2015
Assets:
Equity securities	$	4	$	4	$	—	$	—
Government bonds	67		—		67		—
Total assets at fair value	$	71	$	4	$	67	$	—

Investments primarily consist of equity and debt securities held by our captive insurance entities that are traded in active markets, have readily determined market values and have maturity dates of greater than three months from the date of purchase. These investments primarily represent collateral for several escrow and trust agreements with third-party beneficiaries and are recorded in deferred charges and other in our balance sheets while a portion is included in prepayments and other current assets. As of June 30, 2016 and December 31, 2015, gross unrealized gains and losses on marketable securities were not material.

Restructuring Commitments

Estimated Fair Value

(In millions)	Balance		Level 1		Level 2		Level 3
June 30, 2016
Liabilities:
Issuance of CEC convertible notes	$	1,060	$	—	$	—	$	1,060
Issuance of CEC common shares	1,167		—		1,167		—
Total liabilities at fair value	$	2,227	$	—	$	1,167	$	1,060

Changes in Fair Value

(In millions)	CEC Convertible Notes
Balance as of December 31, 2015	$	—
Initial loss recognized in net loss	1,060
Balance as of June 30, 2016	$	1,060

As described in Note 1, we recognized certain obligations that we believe will ultimately be settled under the Amended Plan or the RSAs. A portion of the obligations we recognized reflect our estimates of the fair value of the consideration CEC has agreed to provide in the form of CEC equity and convertible notes in exchange for the settlement of litigation claims and potential claims against CEC and its affiliates. These obligations are recorded in accrued restructuring and support expenses on the balance sheet and will be accounted for at fair value each period until they are ultimately settled as part of the Restructuring.

Valuation Methodologies

CEC Convertible Notes - We estimated the fair value of the CEC convertible notes to be issued using a binomial lattice valuation model that incorporates the value of both the debt and conversion features of the notes. The notes have a face value of $1.0 billion, a term of 7 years, a coupon rate of 5%, and are convertible into 12.195% of fully-diluted CEC equity. The valuation model incorporates assumptions regarding the incremental cost of borrowing for CEC, the value of CEC’s equity into which these notes could convert, the implied volatility of such equity, and the risk-free rate.

Key Assumptions -


•	Incremental cost of borrowing - 5.5%


•	Implied volatility - 35%


•	Risk-free rate - 1.3%

Should CEC’s estimated incremental cost of borrowing or equity value fluctuate over time, it could result in an increase or decrease in the fair value of the notes and the corresponding restructuring accrual. A hypothetical decrease in the incremental borrowing rate of 1.0% would result in a $40 million increase in the restructuring accrual. Similarly, a hypothetical 5.0% increase in CEC’s equity value would result in an increase to the restructuring accrual of $20 million. Since the key assumptions used in the valuation model, including CEC’s current estimated incremental cost of borrowing and the implied volatility of CEC’s equity, are significant unobservable inputs, the fair value for the convertible notes is classified as Level 3.

CEC Common Stock - We have used the fair value of CEC’s common stock to estimate a portion of the restructuring accrual. The CEC common equity value is subject to market fluctuations and does not necessarily reflect the value of completing the transactions contemplated in the Amended Plan and the related RSAs. The valuation models used to estimate the fair value of CEC’s common stock expected to be issued do not require significant judgment and inputs can be observed in a liquid market, such as the current trading price of CEC common stock. However, the valuation model includes inputs other than quoted prices in active markets, such as adjustments related to the dilutive effects of other transactions, including equity issuances in connection with the Restructuring and the Merger; therefore, this portion of the restructuring accrual is classified as Level 2.

Derivative Instruments

CEOC had eight interest rate swap agreements that expired, which we settled for $17 million during the first quarter of 2015. Interest expense related to the derivatives was $7 million in the first quarter of 2015. We have not entered into any additional derivative transactions since these swaps expired.