AAPL’s 10K shows that the organization is exposed to fluctuating interest rates and it directly affects its investment portfolio and outstanding debt. Variability in US interest rate affects AAPL in a few different ways: a) it affects the interest earned on AAPL’s cash, cash equivalents and marketable securities, b) fair value of those securities, and finally c) interest paid on the AAPL’s debt. AAPL invests in investment grade securities only minimizing risk of any principal loss, however as part of its risk-response strategy the organization’s investment policy prevents the investment to a single issuer.
We can see in figure 5.1 AAPL’s outstanding floating-rate and fixed-rate term debts stands at $104 billion as of September 2017. In figure 5.2 we see AAPL’s term debt and when the payments are due by AAPL as of October, 2017. We can see AAPL’s credit rating from Standard & Poor’s, Moody’s and Fitch group has remained investment grade as in figure 5.3. APPL has an equally strong Debt -Equity ratio as shown in figure 5.
4. We also see that for 100 basis point increase in market interest rates the interest expense on the AAPL’s debt would to increase by $376 million in 2017.The enterprise manages its interest rate exposure by entering into interest-rate swaps, options, and other derivative instruments.
Interest rate swaps allows effective conversion of fixed-rate payments into floating-rate payments or floating-rate payments into fixed-rate payments. As a result gains and losses on term debt are generally offset by the corresponding losses and gains on the related hedging instrument. We also find that to manage interest rate risk on the U.
S. dollar-denominated fixed-rate notes AAPL entered into interest rate swaps which are highlighted in figure 5.5. Furthermore the 10K also highlights that to manage foreign currency risk on AAPL’s foreign currency-denominated notes, the organization has also entered into foreign currency swaps to effectively convert these notes to U.S. dollar-denominated notes as a measure to offset its interest rate risk.