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How the Fed May Have Crushed Apple Inc. (AAPL)’s Cash by Billions

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With Apple Inc. (NASDAQ:AAPL)‘s recent $17 billion bond offering being one for the record books, there have been headlines covering how much credit investors are down on the Mac maker’s paper. What’s less covered is how Apple Inc. (NASDAQ:AAPL)’s own bond holdings may be faring, particularly in light of the Federal Reserve’s recent confirmation that it’s about to start pulling out of the bond market.

Apple Inc. (NASDAQ:AAPL)

That news sent shockwaves through the bond market (along with the stock market), sending yields upwards. The rising yields and falling bond values have a big impact on Apple’s total cash position, which generally includes its long-term marketable securities. Since a non-financial company’s interest rate risk corresponds in large part to its bond holdings and Apple Inc. (NASDAQ:AAPL)’s cash investments have soared, the Mac maker could see its cash crushed by the Fed’s move and the damage could easily amount to billions of dollars.

Straight from the Apple’s mouth
Don’t just take my word for it; Apple’s 10-K estimates the total damage of a 1% parallel shift in the yield curve at $2.1 billion:

Based on investment positions as of September 29, 2012, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $2.1 billion incremental decline in the fair market value of the portfolio. As of September 24, 2011, a similar 100 basis point shift in the yield curve would result in a $913 million incremental decline in the fair market value of the portfolio. Such losses would only be realized if the Company sold the investments prior to maturity.

The $2.1 billion potential decline is significantly larger than the $913 million potential decline that Apple Inc. (NASDAQ:AAPL) faced a year prior, underscoring the increased interest rate risk associated with its growing investment portfolio.

As far as what the yield curve has done since September, the Treasury provides a tool for exactly that. The yield curve has shifted up through the second quarter, but it wasn’t a parallel move.


For the first six months, it was a fairly modest move upwards.


The following three months, which include the Fed’s announcement, were the real kicker.


The bulk of Apple Inc. (NASDAQ:AAPL)’s cash is stashed in long-term securities, and the maturities of these securities are generally between one and five years; this is where Apple’s interest rate risk is concentrated. Here’s how those rates have changed since September.

Maturity 1-Year 2-Year 3-Year 5-Year
June 28, 2013 0.15% 0.36% 0.66% 1.41%
September 28, 2012 0.17% 0.23% 0.31% 0.62%
Difference (0.02%) 0.13% 0.35% 0.79%


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