5. Financial Instruments

The carrying amounts of CBIZ’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of bank debt approximates fair value, as the interest rate on the bank debt is variable and approximates current market rates. The fair value of CBIZ’s convertible senior subordinated notes is based upon quoted market prices. These convertible senior subordinated notes have fixed interest rates and conversion features which are based upon the market value of CBIZ’s common stock. Therefore, the fair value of the convertible senior subordinated notes will fluctuate as market rates of interest and the market value of CBIZ’s common stock fluctuate.

Concentrations of Credit Risk

Financial instruments that may subject CBIZ to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. CBIZ places its cash and cash equivalents with highly-rated financial institutions, limiting the amount of credit exposure with any one financial institution. CBIZ’s client base consists of large numbers of geographically diverse customers dispersed throughout the United States; thus, concentration of credit risk with respect to accounts receivable is not significant.

Bonds

CBIZ held corporate and municipal bonds with par values totaling $36.4 million and $29.0 million at December 31, 2014 and 2013, respectively. All bonds are investment grade and are classified as available-for-sale. CBIZ’s bonds have maturity dates or callable dates ranging from January 2015 through November 2019, and are included in “Funds held for clients – current” in the accompanying Consolidated Balance Sheets based on the intent and ability of the Company to sell these investments at any time under favorable conditions.

The following table summarizes CBIZ’s bond activity for the years ended December 31, 2014 and 2013 (in thousands):


	2014			2013
Fair value at January 1	$	30,011		$	29,776
Purchases		14,089			5,650
Sales		(245	)		(845	)
Maturities and calls		(6,426	)		(4,050	)
Increase (decrease) in bond premium		1,155			(270	)
Fair market value adjustment		(185	)		(250	)

Fair value at December 31	$	38,399		$	30,011

Interest Rate Swaps

CBIZ uses interest rate swaps to manage interest rate risk exposure primarily through converting portions of floating rate debt under the credit facility to a fixed rate basis. These agreements involve the receipt or payment of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amounts. CBIZ does not enter into derivative instruments for trading or speculative purposes.

The CBIZ interest rate swap is designated as a cash flow hedge. Accordingly, the interest rate swap is recorded as either an asset or liability in the accompanying Consolidated Balance Sheets at fair value. Changes in fair value are recorded as a component of accumulated other comprehensive loss (“AOCL”), net of tax, to the extent the swap is effective. Amounts recorded to AOCL are reclassified to interest expense as interest on the underlying debt is recognized. Amounts due related to the swap are recorded as adjustments to interest expense when incurred or payable.

At inception, the critical terms of the interest rate swap matched the underlying risk being hedged, and as such the interest rate swap is expected to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate. The interest rate swap is assessed for effectiveness and continued qualification for hedge accounting on a quarterly basis. For the years ended December 31, 2014 and 2013, the interest rate swap was deemed to be highly effective.

As a result of the use of derivative instruments, CBIZ is exposed to risks that the counterparties would fail to meet their contractual obligations. To mitigate the counterparty credit risk, CBIZ only entered into contracts with selected major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of counterparties. At December 31, 2014 and 2013, all of the counterparties to CBIZ’s interest rate swap had investment grade ratings. There are no credit risk-related contingent features in CBIZ’s interest rate swap nor does the swap contain provisions under which the Company would be required to post collateral.

At December 31, 2014 and 2013, the interest rate swap was classified as a liability derivative. The following table summarizes CBIZ’s outstanding interest rate swap and its classification in the accompanying Consolidated Balance Sheets at December 31, 2014 and 2013 (in thousands).


	December 31, 2014
	Notional Amount		Fair Value (2)			Balance Sheet Location
Interest rate swap (1)	$	25,000	$	(126	)		Other current and non-current liabilities


	December 31, 2013
	Notional Amount		Fair Value (2)			Balance Sheet Location
Interest rate swap	$	40,000	$	(452	)		Other current and non-current liabilities

(1)	Represents interest rate swap with a notional value of $25 million which will expire in June 2015. Under the terms of the interest rate swap, CBIZ pays interest at a fixed rate of 1.41% plus applicable margin as stated in the agreement, and received interest that varied with the three-month LIBOR.

(2)	See additional disclosures regarding fair value measurements in Note 6.

The following table summarizes the effects of the interest rate swap on CBIZ’s accompanying Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013 (in thousands):


	Gain recognized in AOCL, net of tax				Loss reclassified from AOCL into expense
	Twelve Months Ended December 31,				Twelve Months Ended December 31,
	2014		2013		2014			2013			Location
Interest rate swap	$	206	$	230	$	(376	)	$	(459	)		Interest expense