Question

Determining Bond Prices, Interest Rates, and Financial Statement Effects Assume Deere & Company's 2012 10-K reports the following footnote relating to long-term debt. Deere's borrowings include 5250 million, 7.125% notes, due in 2031 bolded below. Long-term borrowings at October 31 consisted of the following in millions of dollars: Notes and Debentures 2012 2011 7.85% debentures due 2015 6.95% notes due 2019: ($700 principal) Swapped to variable interest rates of 6.1%-2012, 6.4%-2011 734 8.95% debentures due 2019 B-1/2 debentures due 2022 105 6.55% debentures due 2028 200 200 8.10% debentures due 2030 250 7.125% notes due 2031 250 250 Other notes Total $ 1,973 $ 1.969 105 250 A recent price quote (from Yahoo! Finance Bond Center) on Deere's 7.125% notes follows. Coupon YTM Current Fitch Type Issuer Price Maturity (%) Yield (%) Rating Callable Corp Deere & CO 134.46 7.125 3-Mar-2031 4.628 5.299 A This price quote indicates that Deere's 7.125% notes have a market price of 134.46 (134.46% of face value), resulting in a yield to maturity of 4.648%. (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.) Interest rates have increased Cinterest rates have remained the same. Interest rates have declined. There is not enough information

Answer 1

Pageno And Her a) Agqume that Deere's Credit rating has remained the same Intrest rates have declined (bonds more attractive and hence led to an increale in its police) option (c) is correct: in intrest rates since Deere iş&ued. The Notes does not effect intrest Expense. The change in intreșt rates only affects the required payment on the liability and theid cash flow.. option (a) is correct a) cash would Deere have to pay to repurchase - the I las notes = 134-46x 250

= 134.46 +250 Page no ioo = 1.3446 X250 = 336.15 cash would Deere have to pay to re purchale the 1.125% notes = ($336115 million = The re purchase would sugult in loss on ve "Purchase of debenturel, which would lower Carrent pre-tax income. (336115-250) Floss = 86.15 million option Ca) iş Correct Market price will the notes sell on their due date in 2031 $250 Million)