Financial Instruments

6 Months Ended

Jun. 30, 2013

3. Financial Instruments

The Company’s valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The ASC Topic on Fair Value Measurements classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

Other than the Futures Contracts, all of the Company’s agency securities and hedging assets and liabilities were valued using Level 2 inputs at June 30, 2013 and December 31, 2012. The Futures Contracts were valued using Level 1 inputs at June 30, 2013. See Notes 4 and 7, respectively for a discussion on how agency securities and hedging assets and liabilities were valued. The carrying values and fair values of all financial instruments as of June 30, 2013 and December 31, 2012 were as follows:


	June 30, 2013				December 31, 2012

	Carrying		Fair		Carrying		Fair

	Value		Value		Value		Value
Assets

Mortgage-backed securities	$	25,256,043	$	25,256,043	$	23,919,251	$	23,919,251

Cash and cash equivalents		88,987		88,987		168,424		168,424

Restricted cash		149,210		149,210		281,021		281,021

Unsettled purchased mortgage backed securities		133,597		133,597		138,338		138,338

Receivable for securities sold		7,251		7,251		1,587,535		1,587,535

Accrued interest receivable		73,957		73,957		77,113		77,113

Principal payments receivable		199,553		199,553		190,832		190,832

Debt security		15,000		14,216		15,000		13,981

Interest rate hedge asset		25,921		25,921		-		-

Short term investment*		19,916		19,916		20,187		20,187

Forward purchase commitments*		-		-		5,452		5,452

Futures contracts*		5,587		5,587		-		-

Liabilities

Repurchase agreements	$	23,077,252	$	23,077,252	$	22,866,429	$	22,866,429

Payable for unsettled securities		136,373		136,373		137,121		137,121

Accrued interest payable		4,773		4,773		7,592		7,592

Interest rate hedge liability		157,869		157,869		243,945		243,945

Forward purchase commitments**		43,724		43,724		-		-

*These lines are included in Other assets on the balance sheets

**This line included in accounts payable and other liabilities on the balance sheets.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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