| Fair value of financial instruments | Note 3 Fair value of financial instruments Carrying value and fair value of financial instruments The following tables provide a comparison of the carrying and fair values for each classification of financial instruments. Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried at fair value when conditions requiring separation are met.
As at October 31, 2021
Carrying value and fair value Carrying value Fair value
(Millions of Canadian dollars) Financial Financial Financial Financial Financial Financial Total Total
Financial assets
Interest-bearing deposits with banks $ – $ 56,896 $ – $ – $ 22,742 $ 22,742 $ 79,638 $ 79,638
Securities
Trading 125,801 13,439 – – – – 139,240 139,240
Investment, net of applicable allowance – – 77,802 533 67,149 66,823 145,484 145,158
125,801 13,439 77,802 533 67,149 66,823 284,724 284,398
Assets purchased under reverse repurchase agreements and securities borrowed 265,011 – – – 42,892 42,892 307,903 307,903
Loans, net of applicable allowance
Retail – 241 327 – 500,621 502,277 501,189 502,845
Wholesale 8,428 2,769 813 – 204,376 204,683 216,386 216,693
8,428 3,010 1,140 — 704,997 706,960 717,575 719,538
Other
Derivatives 95,541 – – – – – 95,541 95,541
Other assets (1) 4,109 – – – 58,483 58,483 62,592 62,592
Financial liabilities
Deposits
Personal $ 321 $ 18,328 $ 343,839 $ 344,040 $ 362,488 $ 362,689
Business and government (2) 739 131,630 563,984 565,106 696,353 697,475
Bank (3) – 17,251 24,739 24,743 41,990 41,994
1,060 167,209 932,562 933,889 1,100,831 1,102,158
Other
Obligations related to securities sold short 37,841 – – – 37,841 37,841
Obligations related to assets sold under repurchase agreements and securities loaned – 236,147 26,054 26,054 262,201 262,201
Derivatives 91,439 – – – 91,439 91,439
Other liabilities (4) 654 171 64,746 64,749 65,571 65,574
Subordinated debentures – – 9,593 9,601 9,593 9,601
As at October 31, 2020
Carrying value and fair value Carrying value Fair value
(Millions of Canadian dollars) Financial Financial Financial Financial Financial Financial Total Total
Financial assets
Interest-bearing deposits with banks $ – $ 21,603 $ – $ – $ 17,410 $ 17,410 $ 39,013 $ 39,013
Securities
Trading 126,027 10,044 – – – – 136,071 136,071
Investment, net of applicable allowance – – 81,395 525 57,823 58,627 139,743 140,547
126,027 10,044 81,395 525 57,823 58,627 275,814 276,618
Assets purchased under reverse repurchase agreements and securities borrowed 264,394 – – – 48,621 48,621 313,015 313,015
Loans, net of applicable allowance
Retail – 253 260 – 454,429 462,884 454,942 463,397
Wholesale 6,197 2,363 744 – 196,746 198,753 206,050 208,057
6,197 2,616 1,004 – 651,175 661,637 660,992 671,454
Other
Derivatives 113,488 – – – – – 113,488 113,488
Other assets (1) 3,414 – – – 57,065 57,065 60,479 60,479
Financial liabilities
Deposits
Personal $ 104 $ 17,096 $ 325,852 $ 324,804 $ 343,052 $ 342,004
Business and government (2) 389 107,466 516,456 518,501 624,311 626,356
Bank (3) – 18,015 26,507 26,518 44,522 44,533
493 142,577 868,815 869,823 1,011,885 1,012,893
Other
Obligations related to securities sold short 29,285 – – – 29,285 29,285
Obligations related to assets sold under repurchase agreements and securities loaned – 255,922 18,309 18,309 274,231 274,231
Derivatives 109,927 – – – 109,927 109,927
Other liabilities (4) 80 86 65,712 65,719 65,878 65,885
Subordinated debentures – – 9,867 10,071 9,867 10,071
(1) Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
(2) Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
(3) Bank deposits refer to deposits from regulated banks and central banks.
(4) Includes Acceptances and financial instruments recognized in Other liabilities. Financial assets designated as fair value through profit or loss For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the difference between the total change in the fair value of the instrument during the period and the change in fair value calculated using the appropriate risk-free yield curves. For the year ended October 31, 2021, the change in fair value during the period attributable to changes in credit risk for positions still held was a gain gain Financial liabilities designated as fair value through profit or loss For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected duration of the instrument to measure the change in fair value attributable to changes in credit risk.
As at or for the year ended October 31, 2021
Contractual amount Carrying value Difference maturity amount Changes in fair value attributable
(Millions of Canadian dollars) During the period Cumulative
Term deposits
Personal $ 18,205 $ 18,328 $ 123 $ (17 ) $ 72
Business and government (3) 131,830 131,630 (200 ) (75 ) 416
Bank (4) 17,253 17,251 (2 ) – –
167,288 167,209 (79 ) (92 ) 488
Obligations related to assets sold under repurchase agreements and securities loaned 236,164 236,147 (17 ) (8 ) –
Other liabilities 171 171 – – –
$ 403,623 $ 403,527 $ (96 ) $ (100 ) $ 488
As at or for the year ended October 31, 2020 (1)
Contractual amount Carrying value Difference maturity amount Changes in fair value attributable
(Millions of Canadian dollars) During the period Cumulative (2)
Term deposits
Personal $ 17,279 $ 17,096 $ (183 ) $ 67 $ 89
Business and government (3) 106,153 107,466 1,313 281 491
Bank (4) 18,016 18,015 (1 ) – –
141,448 142,577 1,129 348 580
Obligations related to assets sold under repurchase agreements and securities loaned 255,908 255,922 14 8 8
Other liabilities 86 86 – – –
$ 397,442 $ 398,585 $ 1,143 $ 356 $ 588
(1) There are no significant changes in fair value attributable to changes in credit risk included in net income for positions still held.
(2) The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2021, $25 million of fair value losses previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2020 –
(3) Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4) Bank term deposits refer to amounts from regulated banks and central banks. Net gains (losses) from financial instruments classified and designated as fair value through profit or loss Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in Non-interest
For the year ended
(Millions of Canadian dollars) October 31 October 31
Net gains (losses) (1)
Classified as fair value through profit or loss (2) $ 3,447 $ (69 )
Designated as fair value through profit or loss (3) (1,407 ) 1,533
$ 2,040 $ 1,464
By product line (1)
Interest rate and credit (4) $ 1,033 $ 1,490
Equities 57 (501 )
Foreign exchange and commodities 950 475
$ 2,040 $ 1,464
(1) Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net losses
(2) Excludes derivatives designated in a hedging relationship. Refer to Note 8 for net gains (losses) on these derivatives.
(3) For the year ended October 31, 2021, $1,408 million of net fair value losses Non-interest
(4) Includes gains (losses) recognized on cross currency interest rate swaps. Net interest income from financial instruments Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are reported in Net interest income.
For the year ended
(Millions of Canadian dollars) October 31 October 31
Interest and dividend income (1), (2)
Financial instruments measured at fair value through profit or loss $ 4,551 $ 8,480
Financial instruments measured at fair value through other comprehensive income 375 957
Financial instruments measured at amortized cost 23,219 25,446
28,145 34,883
Interest expense (1)
Financial instruments measured at fair value through profit or loss $ 2,865 $ 6,065
Financial instruments measured at amortized cost (3) 5,278 7,983
8,143 14,048
Net interest income $ 20,002 $ 20,835
(1) Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest income of $576 million (October 31, 2020 – $521 million), and Interest expense of $4 million (October 31, 2020 – $7 million).
(2) Includes dividend income for the year ended October 31, 2021 of $2,436 million (October 31, 2020 – $2,670 million), which is presented in Interest and dividend income in the Consolidated Statements of Income.
(3) Includes interest expense on lease liabilities for the year ended October 31, 2021 of $110 million (October 31, 2020 – $123 million) . Fee income arising from financial instruments For the year ended October 31, 2021, we earned $5,583 million million Non-interest Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
As at
October 31, 2021 October 31, 2020
Fair value measurements using Netting adjustments Fair value Fair value measurements using Netting adjustments Fair value
(Millions of Canadian dollars) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Financial assets
Interest-bearing deposits with banks $ – $ 56,896 $ – $ $ 56,896 $ – $ 21,603 $ – $ $ 21,603
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal 8,977 2,380 – 11,357 12,773 3,012 – 15,785
Provincial and municipal – 11,068 – 11,068 – 11,562 – 11,562
U.S. federal, state, municipal and agencies (1) 215 22,738 25 22,978 1,508 35,029 44 36,581
Other OECD government (2) 2,729 5,730 – 8,459 3,085 3,380 – 6,465
Mortgage-backed securities (1) – 4 – 4 – 39 – 39
Asset-backed securities
Non-CDO – 891 2 893 – 526 2 528
Corporate debt and other debt – 23,085 25 23,110 – 21,464 30 21,494
Equities 56,826 3,015 1,530 61,371 39,795 2,561 1,261 43,617
68,747 68,911 1,582 139,240 57,161 77,573 1,337 136,071
Investment
Debt issued or guaranteed by:
Canadian government (1)
Federal 1,973 1,730 – 3,703 647 1,894 – 2,541
Provincial and municipal – 3,132 – 3,132 – 3,233 – 3,233
U.S. federal, state, municipal and agencies (1) 12 34,815 – 34,827 160 38,364 – 38,524
Other OECD government – 5,956 – 5,956 – 7,345 – 7,345
Mortgage-backed securities (1) – 2,727 20 2,747 – 2,343 27 2,370
Asset-backed securities
CDO – 7,074 – 7,074 – 7,414 – 7,414
Non-CDO – 586 – 586 – 854 – 854
Corporate debt and other debt – 19,625 152 19,777 – 18,954 160 19,114
Equities 46 153 334 533 38 152 335 525
2,031 75,798 506 78,335 845 80,553 522 81,920
Assets purchased under reverse repurchase agreements and – 265,011 – 265,011 – 264,394 – 264,394
Loans – 11,501 1,077 12,578 – 8,747 1,070 9,817
Other
Derivatives
Interest rate contracts – 33,857 320 34,177 1 53,720 501 54,222
Foreign exchange contracts – 41,224 74 41,298 – 39,246 57 39,303
Credit derivatives – 34 – 34 – 463 – 463
Other contracts 3,175 17,955 26 21,156 4,458 16,767 36 21,261
Valuation adjustments – (819 ) 9 (810 ) – (1,112 ) 8 (1,104 )
Total gross derivatives 3,175 92,251 429 95,855 4,459 109,084 602 114,145
Netting adjustments (314 ) (314 ) (657 ) (657 )
Total derivatives 95,541 113,488
Other assets 1,474 2,635 – 4,109 1,154 2,207 53 3,414
$ 75,427 $ 573,003 $ 3,594 $ (314 ) $ 651,710 $ 63,619 $ 564,161 $ 3,584 $ (657 ) $ 630,707
Financial liabilities
Deposits
Personal $ – $ 18,498 $ 151 $ $ 18,649 $ – $ 17,061 $ 139 $ $ 17,200
Business and government – 132,369 – 132,369 – 107,855 – 107,855
Bank – 17,251 – 17,251 – 18,015 – 18,015
Other
Obligations related to securities sold short 18,345 19,496 – 37,841 12,484 16,801 – 29,285
Obligations related to assets sold under repurchase agreements and securities loaned – 236,147 – 236,147 – 255,922 – 255,922
Derivatives
Interest rate contracts – 28,566 955 29,521 – 46,723 1,089 47,812
Foreign exchange contracts – 40,484 27 40,511 – 38,210 35 38,245
Credit derivatives – 120 – 120 – 531 – 531
Other contracts 3,699 17,456 419 21,574 5,734 18,041 337 24,112
Valuation adjustments – 38 (11 ) 27 – (84 ) (32 ) (116 )
Total gross derivatives 3,699 86,664 1,390 91,753 5,734 103,421 1,429 110,584
Netting adjustments (314 ) (314 ) (657 ) (657 )
Total derivatives 91,439 109,927
Other liabilities 258 560 7 825 118 10 38 166
$ 22,302 $ 510,985 $ 1,548 $ (314 ) $ 534,521 $ 18,336 $ 519,085 $ 1,606 $ (657 ) $ 538,370
(1) As at October 31, 2021, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $13,124 million million million
(2) Organisation for Economic Co-operation
(3) Collateralized debt obligations (CDO). Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table using the following valuation techniques and inputs. Interest-bearing deposits with banks The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable. Government bonds (Canadian, U.S. and other OECD governments) Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy. Corporate and U.S. municipal bonds The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state, municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash flow method using rate inputs such as benchmark yields (CDOR, LIBOR and other similar reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy. Asset-backed securities and Mortgage-backed securities Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes, broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy. Equities Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active markets are not readily available, fair value is determined based on quoted market prices for similar securities or through valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy. Loans Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have significant impacts on the fair values are classified as Level 3 in the hierarchy. Derivatives The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign exchange contracts and credit derivatives. The exchange-traded or OTC interest rate, foreign exchange and equity derivatives are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party consensus pricing information are not available. The valuation models, such as discounted cash flow method or Black-Scholes option model, incorporate observable or unobservable inputs for interest and foreign exchange rates, equity and commodity prices (including indices), credit spreads, corresponding market volatility levels, and other market-based pricing factors. Other adjustments to fair value include bid-offer, Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements In the fair value hierarchy table, these instruments are included in Assets purchased und e of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable. Deposits A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates. Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments) The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine their fair values, ranges and weighted averages of unobservable inputs.
As at October 31, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value Range of input values
Products Reporting line in the fair value Assets Liabilities Valuation Significant Low High Weighted Inputs
Corporate debt and related derivatives Price-based Prices $ 29.18 $ 127.09 $ 96.36
Corporate debt and other debt $ 27 Discounted cash flows Credit spread 1.15% 6.92% 4.04%
Loans 1,077 Credit enhancement 11.92% 15.90% 13.25%
Derivative related liabilities $ 9
Government debt and municipal bonds Price-based Prices n.a. n.a. n.a.
Corporate debt and other debt 150 Discounted cash flows Yields 3.91% 8.17% 5.91%
Private equities, hedge fund investments and related equity derivatives Market comparable EV/EBITDA multiples 8.82X 26.00X 9.16X
Equities 1,864 Price-based P/E multiples 9.40X 38.00X 10.96X
Derivative related liabilities 2 Discounted cash flows EV/Rev multiples 1.14X 20.80X 5.40X
Liquidity discounts (4) 10.00% 40.00% 16.40%
Discount rate 10.65% 10.65% 10.65%
NAV / prices (5) n.a. n.a. n.a.
Interest rate derivatives and interest-rate-linked structured notes (6), (7) Discounted cash flows Interest rates 0.13% 2.46% High
Derivative related assets 367 Option pricing model CPI swap rates 1.76% 2.42% Even
Derivative related liabilities 974 IR-IR 19.00% 67.00% Even
FX-IR 29.00% 56.00% Even
FX-FX 68.00% 68.00% Even
Equity derivatives and equity-linked structured notes (6), (7) Discounted cash flows Dividend yields 0.00% 6.37% Lower
Derivative related assets 25 Option pricing model Equity (EQ)-EQ 32.00% 95.00% Middle
Deposits 151 EQ-FX (60.60)% 27.30% Middle
Derivative related liabilities 381 EQ volatilities 8.00% 128.00% Upper
Other (8)
Asset-backed securities 2
Derivative related assets 37
Other assets –
Mortgage-backed securities 20
U.S. state, municipal and agencies debt 25
Derivative related liabilities 24
Other liabilities 7
Total $ 3,594 $ 1,548
As at October 31, 2020 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value Range of input values (1), (2)
Products Reporting line in the fair value Assets Liabilities Valuation Significant Low High Weighted Inputs
Corporate debt and related derivatives Price-based Prices $ 1.33 $ 136.34 $ 94.23
Corporate debt and other debt $ 33 Discounted cash flows Credit spread 1.75% 14.10% 7.93%
Loans 1,070 Credit enhancement 11.82% 15.75% 13.13%
Derivative related liabilities $ 25
Government debt and municipal bonds Price-based Prices $ 64.62 $ 64.62 $ 64.62
Corporate debt and other debt 157 Discounted cash flows Yields 4.21% 7.89% 5.88%
Private equities, hedge fund investments and related equity derivatives Market comparable EV/EBITDA multiples 7.00X 15.38X 13.31X
Equities 1,596 Price-based P/E multiples 9.40X 33.47X 19.10X
Derivative related liabilities 10 Discounted cash flows EV/Rev multiples 1.61X 9.10X 2.04X
Liquidity discounts (4) 10.00% 40.00% 16.40%
Discount rate 10.52% 10.52% 10.52%
NAV / prices (5) n.a. n.a. n.a.
Interest rate derivatives and interest-rate-linked structured notes (6), (7) Discounted cash flows Interest rates 1.20% 1.60% Even
Derivative related assets 540 Option pricing model CPI swap rates 1.46% 1.83% Even
Derivative related liabilities 1,103 IR-IR 19.00% 67.00% Even
FX-IR 29.00% 56.00% Even
FX-FX 68.00% 68.00% Even
Equity derivatives and equity-linked structured notes (6), (7) Discounted cash flows Dividend yields 0.00% 11.38% Lower
Derivative related assets 36 Option pricing model Equity (EQ)-EQ correlations 21.90% 97.00% Middle
Deposits 139 EQ-FX (71.40)% 45.10% Middle
Derivative related liabilities 238 EQ volatilities 9.00% 176.00% Upper
Other (8)
Asset-backed securities 2
Derivative related assets 26
Other assets 53
Mortgage-backed securities 27
U.S. state, municipal and agencies debt 44
Derivative related liabilities 53
Other liabilities 38
Total $ 3,584 $ 1,606
(1) The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is indicated in the table.
(2) Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or pre-quarter-end
(3) The significant unobservable inputs include
(4) Fair value of securities with liquidity discount inputs totalled $385 million (October 31, 2020 – $286 million).
(5) NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. Private equities are valued based on NAV or valuation techniques. The range for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
(6) The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed across the range. In the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed throughout the range.
(7) The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
(8) Other primarily includes certain insignificant instruments such as auction rate securities, commodity derivatives, foreign exchange derivatives, contingent considerations, bank-owned life insurance and retractable shares.
n.a. not applicable Sensitivity to unobservable inputs and interrelationships between unobservable inputs Yield, credit spreads/discount margins A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation, would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the difference between a debt instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit quality ratings, similar maturities and are often government bonds. The credit spread/discount margin therefore represents the discount rate used to determine the present value of future cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. The credit spread/discount margin for an instrument forms part of the yield used in a discounted cash flow method. Funding spread Funding spreads are credit spreads specific to funding or deposit rates. A decrease in funding spreads, on its own, will increase the fair value of our liabilities, and vice versa. Default rates A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government Prepayment rates A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates. Recovery and loss severity rates A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa. Volatility rates Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s market price, the strike price and maturity. Dividend yields A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms. Correlation rates Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of the instrument. Interest rates An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the discounted cash flow value of a financial instrument, and vice versa. Consumer Price Index swap rates A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services, such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger, and vice versa. EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions exist to support the valuations. Credit Enhancement Credit enhancement is an input to the valuation of securitized transa |
