Deere & Company's 2012 10-K reports the following footnote relating to long-term debt for its equipment operations
Question:
Deere \& Company's 2012 10-K reports the following footnote relating to long-term debt for its equipment operations subsidiary. Deere's borrowings include \(\$ 300\) million, \(7.125 \%\) notes, due in 2031 (highlighted below).
A recent price quote (from Yahoo! Finance Bond Center) on Deere's \(7.125 \%\) notes follows.
This price quote indicates that Deere's \(7.125 \%\) notes have a market price of 131.47 (131.47\% of face value), resulting in a yield to maturity of \(4.488 \%\).
a. Assuming that these notes were originally issued at par value, what does the market price reveal about interest rate changes since Deere issued its notes? (Assume that Deere's credit rating has remained the same.)
b. Does the change in interest rates since the issuance of these notes affect the amount of interest expense that Deere reports in its income statement? Explain.
c. How much cash would Deere have to pay to repurchase the \(7.125 \%\) notes at the quoted market price of 131.47? (Assume no interest is owed when Deere repurchases the notes.) How would the repurchase affect Deere's current income?
d. Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 2031 ?
Step by Step Answer:
Financial And Managerial Accounting For MBAs
ISBN: 9781618533593
6th Edition
Authors: Peter D. Easton