NOTE >8 > FINANCIAL INSTRUMENTS

In the normal course of business, the Company invests in various financial assets, incurs various financial liabilities and enters into agreements involving off-balance sheet financial instruments. The Company's financial assets and liabilities are recorded in the consolidated balance sheets at historical cost, which approximates fair value.

To determine fair value, credit card receivables are valued by discounting estimated future cash flows. The estimated cash flows reflect the historical cardholder payment experience and are discounted at market rates. Long-term debt is valued based on quoted market prices when available or discounted cash flows, using interest rates currently available to the Company on similar borrowings.

The Company is a party to off-balance sheet financial instruments to manage interest rate and foreign currency risk. These financial instruments involve, to varying degrees, elements of market, credit, foreign exchange and interest rate risk in excess of amounts recognized in the balance sheet. In certain transactions, the Company may require collateral or other security to support the off-balance sheet financial instruments with credit risk.

Debt-related
The Company had the following off-balance sheet financial instruments related to its outstanding borrowings at the end of 1999 and 1998:

The Company uses interest rate swaps to manage the interest rate risk associated with its borrowings and to manage the Company's allocation of fixed and variable-rate debt. For pay floating rate, receive fixed rate swaps, the Company paid a weighted average rate of 5.21% and received a weighted average rate of 6.87% in 1999. For pay fixed rate, receive floating rate swaps, the Company paid a weighted average rate of 6.68% and received a weighted average rate of 5.21% in 1999. The fair values of interest rate swaps are based on prices quoted from dealers. If a counterparty fails to meet the terms of a swap agreement, the Company's exposure is limited to the net amount that would have been received, if any, over the agreement's remaining life.

Maturity dates of the off-balance sheet financial instruments outstanding at January 1, 2000 are as follows:

During 1997, the Company paid $633 million to terminate interest rate swaps. The deferred loss related to these terminations was $415 million and $441 million at January 1, 2000, and January 2, 1999, respectively, and is being amortized over the remaining lives of the original swap periods.

Credit-related
The Company had outstanding domestic securitized credit card receivables sold of $6.58 and $6.63 billion at January 1, 2000, and January 2, 1999, respectively, for which the Company's credit risk exposure is contractually limited to the investor certificates held by the Company.

Other
The Company had a financial guaranty of $89 million at January 1, 2000. This guaranty represents a commitment by the Company to guarantee the performance of certain municipal bonds issued in connection with the Company's headquarters building. No amounts were accrued in the balance sheet for any potential loss associated with this guaranty at January 1, 2000, and January 2, 1999.

  Annual Report 1999