Financial Instruments

3 Months Ended

Mar. 31, 2014

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 other derivatives were valued using Level 2 inputs at March 31, 2014 and December 31, 2013. The Futures Contracts were valued using Level 1 inputs at March 31, 2014 and December 31, 2013. See Notes 4 and 7, respectively, for discussion on how agency securities and other derivatives were valued.

The carrying values and fair values of all financial instruments as of March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Mortgage-backed securities	$	17,137,956	$	17,137,956	$	17,642,532	$	17,642,532
Cash and cash equivalents		250,258		250,258		763,326		763,326
Restricted cash		231,591		231,591		225,379		225,379
Unsettled purchased mortgage backed securities		157,201		157,201		-		-
Accrued interest receivable		53,629		53,629		55,156		55,156
Receivable for securities sold		-		-		231,214		231,214
Principal payments receivable		70,524		70,524		95,021		95,021
Debt security, held to maturity		15,000		14,482		15,000		14,307
Interest rate swap asset		12,703		12,703		15,841		15,841
Futures Contracts*		5,617		5,617		11,148		11,148
Short term investment*		20,052		20,052		19,910		19,910
Forward purchase commitments*		2,042		2,042		-		-
Liabilities
Repurchase agreements	$	15,183,457		15,183,457	$	16,129,683	$	16,129,683
Dollar roll liabilities		-		-		351,826		351,826
Payable for unsettled securities		157,387		157,387		-		-
Accrued interest payable		3,475		3,475		8,279		8,279
Interest rate swap liability		106,132		106,132		125,133		125,133
Futures contract liability		48,584		48,584		36,733		36,733
Forward purchase commitments**		13,634		13,634		5,741		5,741

*These lines are included in other assets on the consolidated balance sheets.

**This line is included in accounts payable and other liabilities on the consolidated 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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