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Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere & Company's 2018 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). Long-term borrowings at October 28 consisted of the following in millions of dollars: Notes and Debentures 2018 2017 $750 105 4.375% notes due 2019 8-1/2 % debentures due 2022 $105 2.60% notes due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 3.90% notes due 2042 Other notes Total 1,000 1,000 200 300 200 500 250 500 SEA 250 300 300 1,250 1,250 1,190 1,136 $4,714 $5,491 A recent price quote (from Markets Insider) on Deere's 7.125 % notes follows. Coupon Fitch (%) Maturity Yield (%) Rating Callable A2 No Type Issuer Price Corp Deere & CO 131.03 7.125 2031 2.82% This price quote indicates that Deere's 7.125 % notes have a market price of 131.03 (131.03% of face value), resulting in a yield of 2.82%. (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.) Cinterest rates have remained the same. OThere is not enough information. Ointerest rates have increased. CInterest rates have declined.

Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere & Company's 2018 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). Long-term borrowings at October 28 consisted of the following in millions of dollars: Notes and Debentures 2018 2017 $750 105 4.375% notes due 2019 8-1/2 % debentures due 2022 $105 2.60% notes due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 3.90% notes due 2042 Other notes Total 1,000 1,000 200 300 200 500 250 500 SEA 250 300 300 1,250 1,250 1,190 1,136 $4,714 $5,491 A recent price quote (from Markets Insider) on Deere's 7.125 % notes follows. Coupon Fitch (%) Maturity Yield (%) Rating Callable A2 No Type Issuer Price Corp Deere & CO 131.03 7.125 2031 2.82% This price quote indicates that Deere's 7.125 % notes have a market price of 131.03 (131.03% of face value), resulting in a yield of 2.82%. (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.) Cinterest rates have remained the same. OThere is not enough information. Ointerest rates have increased. CInterest rates have declined.

Cornerstones of Financial Accounting
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter9: Long-term Liabilities
Section: Chapter Questions
Problem 91PSB
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(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. OYes, the decline in interest rates results in a decline in interest expense. OBecause accounting is inherently conservative, declines in interest rates are not reflected in a reduction of interest expense. However, the increase in interest expense resulting from an increase in rates is recognized. ONO, the change in interest rates since Deere issued the notes does not affect interest expense. OThe change in interest rates only affects the required payment on the liability and, thus, cash flow. (c) How much cash would Deere have to pay to repurchase the 7.125% notes at the quoted market price of 131.03%? (Assume no interest is owed when Deere repurchases the notes.) Round your answer to two decimal places. $ million How would the repurchase affect Deere's current income? OThe repurchase would result in a loss on repurchase of debentures, which would lower current pre-tax income. OCash and bonds payable both decrease by the same amount. No gain or loss is recognized. OThe repurchase only affects cash flow, not income. Olncome is not affected because the liability has been reported at fair value since inception. As a result, the repurchase price is equal to the book value and no gain or loss is recognized. (d) Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 2031? $ million
Transcribed Image Text:(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. OYes, the decline in interest rates results in a decline in interest expense. OBecause accounting is inherently conservative, declines in interest rates are not reflected in a reduction of interest expense. However, the increase in interest expense resulting from an increase in rates is recognized. ONO, the change in interest rates since Deere issued the notes does not affect interest expense. OThe change in interest rates only affects the required payment on the liability and, thus, cash flow. (c) How much cash would Deere have to pay to repurchase the 7.125% notes at the quoted market price of 131.03%? (Assume no interest is owed when Deere repurchases the notes.) Round your answer to two decimal places. $ million How would the repurchase affect Deere's current income? OThe repurchase would result in a loss on repurchase of debentures, which would lower current pre-tax income. OCash and bonds payable both decrease by the same amount. No gain or loss is recognized. OThe repurchase only affects cash flow, not income. Olncome is not affected because the liability has been reported at fair value since inception. As a result, the repurchase price is equal to the book value and no gain or loss is recognized. (d) Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 2031? $ million
Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere & Company's 2018 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). Long-term borrowings at October 28 consisted of the following in millions of dollars: Notes and Debentures 2018 2017 $750 105 4.375% notes due 2019 8-1/2 % debentures due 2022 $105 2.60% notes due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 3.90% notes due 2042 Other notes Total 1,000 1,000 200 300 200 500 250 500 SEA 250 300 300 1,250 1,250 1,190 1,136 $4,714 $5,491 A recent price quote (from Markets Insider) on Deere's 7.125 % notes follows. Coupon Fitch (%) Maturity Yield (%) Rating Callable A2 No Type Issuer Price Corp Deere & CO 131.03 7.125 2031 2.82% This price quote indicates that Deere's 7.125% notes have a market price of 131.03 (131.03% of face value), resulting in a yield of 2.82%. (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.) Cinterest rates have remained the same. OThere is not enough information. Ointerest rates have increased. CInterest rates have declined.
Transcribed Image Text:Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere & Company's 2018 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). Long-term borrowings at October 28 consisted of the following in millions of dollars: Notes and Debentures 2018 2017 $750 105 4.375% notes due 2019 8-1/2 % debentures due 2022 $105 2.60% notes due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 3.90% notes due 2042 Other notes Total 1,000 1,000 200 300 200 500 250 500 SEA 250 300 300 1,250 1,250 1,190 1,136 $4,714 $5,491 A recent price quote (from Markets Insider) on Deere's 7.125 % notes follows. Coupon Fitch (%) Maturity Yield (%) Rating Callable A2 No Type Issuer Price Corp Deere & CO 131.03 7.125 2031 2.82% This price quote indicates that Deere's 7.125% notes have a market price of 131.03 (131.03% of face value), resulting in a yield of 2.82%. (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.) Cinterest rates have remained the same. OThere is not enough information. Ointerest rates have increased. CInterest rates have declined.
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