Reproduced below is the long-term debt footnote from the \(10-\mathrm{K}\) report of Southwest Airlines.

*The carrying value of these debentures is 103 while the face value is 100 . The company marks these debentures to market each period because the debentures are hedged with interest-rate swaps. The swap and the debentures are both marked to market, where any gains and losses offset each other.
As of December 31, 2007, aggregate annual principal maturities of debt and capital leases (not including amounts associated with interest rate swap agreements and interest on capital leases) for the five-year period ending December 31,2012 , were \(\$ 40\) million in \(2008, \$ 42\) million in 2009, \(\$ 50\) million in \(2010, \$ 44\) million in \(2011, \$ 418\) million in 2012 , and \(\$ 1.5\) billion thereafter.

Reproduced below is a summary of the market values of the Southwest Airlines ' bonds maturing from 2012 to 2027 (from Capital IQ).

\section*{Required}

a. What is the amount of long-term debt reported on Southwest's 2007 balance sheet? What are the scheduled maturities for this indebtedness? Why is information relating to a company's scheduled maturities of debt useful in an analysis of its financial condition?

b. Southwest reported \(\$ 119\) million in interest expense in its 2007 income statement. In the note to its statement of cash flows, Southwest indicates that the cash portion of this expense is \(\$ 63\) million. What could account for the difference between interest expense and interest paid? Explain.

c. Southwest's long-term debt is rated "BBB + " by Fitch and similarly by other credit rating agencies. What factors would be important to consider in attempting to quantify the relative riskiness of Southwest compared with other borrowers? Explain.

d. Southwest's \(\$ 385\) million \(6.5 \%\) notes traded at 97.290 , or \(97.29 \%\) of par, as of December 2008 What is the market value of these notes on that date? How is the difference between this market value and the \(\$ 385\) million face value reflected in Southwest's financial statements? What effect would the repurchase of this entire note issue have on Southwest's financial statements? What does the 97.290 price tell you about the general trend in interest rates since Southwest sold this bond issue? Explain.

e. Examine the yields to maturity of the three bonds in the table above. What relation do we observe between these yields and the maturities of the bonds? Also, explain why this relation applies in general.

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Long-Term Debt (in millions) 7% % Notes due 2007.... French Credit Agreements due 2012. 6% Notes due 2012 $ 2007 - 2006 $ 100 32 37 386 369 54% Notes due 2014 352 336 5% Notes due 2016. 300 300 5%% Notes due 2017. 311 300 French Credit Agreements due 2017. 94 100 Pass Through Certificates 480 73% Debentures due 2027. 103" 100 Capital leases... 52 63 2,110 1,705 Less current maturities... 41 122 Less debt discount and issuance costs. 19 16 $2,050 $1,567