Asa senior partner at one of the nation’s largest public accounting firms, you serve as chairperson of the firm’s financial reporting policy committee. You are also the firm's chief spokesperson on financial reporting matters that come before the FASB and the Securities and Exchange Two new debt securities have caught the attention of your committee, the FASB, the SEC, and the Treasury Department. Dresser Industries recently completed a \($200\) million offering of so-called century bonds that mature in 2096, or in 100 years. Safra Republic Holdings announced that in October it will issue \($250\) million of millennium bonds that mature in 2997, or in 1,000 years. Neither company is a client of the firm.
FIRM TO ISSUE \($200\) MILLION IN BONDS AS 100-YEAR PAPER Dresser Industries Inc. said it will join the ranks of the small number of companies that have century bonds with the sale of \($200\) million of debentures due 2096. The oil-field services company said the sale, with Salomon Brothers Inc. as lead underwriter, is expected to occur this week. Proceeds will be used for general corporate purposes, including repayment of commercial paper outstanding and share repurchases.

The issue hasn't been priced, but analysts expect the rate to be about 7.5%. Only nine companies have issued 100-year paper since 1993, when Walt Disney Co. began the modern trend;
no such bonds had been sold for more than 20 years. Earlier this year, the U.S. Treasury Department proposed that companies be prohibited from deducting interest on bonds with a maturity of more than 40 years, but Congress hasn't voted on the matter.

SAFRA REPUBLIC \($250\) MILLION 1000-YEAR SUBORDINATED DEBENTURES RATED ‘AA-’ BY FITCH Safra Republic Holdings S.A’s (SRH) \($250\) million issue of 7.125% subordinated debentures, due October 15, 2997, is rated ‘AA-’ by Fitch. The rating reflects superior risk-based capital ratios, indicative of the modest amount of assets represented by loans; sizable liquidity; comfortable funding from a growing client base; and a management organization seasoned in relationships with high net worth clients in over 80 countries.
SRH’s 49% ownership by the Republic National Bank of New York provides important support by a risk averse U.S.

banking institution, whose fundamentals garner a AA+’ senior debt rating.
SRH is a Luxembourg-based holding company, operated through six wholly owned banking subsidiaries. These units provide international private banking, asset management and other related investment services to over 22,000 high net worth individuals, partnerships and closely held corporations. Client assets at SRH, both on- and off-balance sheet, stood at \($29\) billion at the end of September, compared to \($20.8\) billion at the like date in 1996.

ISTHE PARTY OVER FOR 100-YEAR BONDS?
In recent months, a number of U.S. companies have been tapping the market for so-called century bonds, taking advantage of low interest rates and a strong appetite among some institutional investors for such long-term debt.
But the days may be numbered for this rather obscure part of the bond market. The Treasury Department is proposing to eliminate the corporate tax deduction for interest paid on the last 60 years of century bonds, effectively killing the securities.
The proposal is included in President Clinton’s fiscal 1998 budget, which will be unveiled Thursday.
The Treasury argues that 100-year debt should be treated the same as equity because the bonds are more like permanent capital. Since stock dividend payments can’t be deducted from taxable earnings, the Treasury says, interest payments on the last 60 years of 100-year debt shouldn’t be deductible either.
Corporate treasurers and Wall Street underwriters say they will fight the proposal. They contend that ending the tax break for 100-year bonds will put U.S. companies at a competitive disadvantage to foreign-bond issuers, which aren't subject to US. tax.
For now, prospects for the tax change are unclear. When the idea surfaced in December 1995, it cast a pall over century bond issues. The market recovered only after congressional tax committee chairmen said any changes wouldn't affect bond issues completed before their committees take action. In the meantime, century bonds are likely to remain a popular financing tool for corporate treasurers, especially if interest rates remain low. The reason is clear: The bonds offer really long-term money at a relatively cheap price. Institutional investors, in turn, like the bonds because they offer a predictable rate of return that is better than what companies—or the U.S. Treasury—offer for 30-year debt.

The risk/reward decisions investors are making are crucial to the popularity of the century bonds. One risk with most of the offerings is that interest rates can shoot up, leaving the investor with a stream of payments that are woefully weak in future years and a trading price that would result in a big loss if the bonds are sold in the open market. So too, there is less chance a company will be in business in 100 years than in the next 20 or 30 years.
Most of the railroad companies that issued century bonds in the 1860s and 1870s weren't around when it came to paying back bondholders. Of the companies and institutions recently issuing century bonds, only a few have met the 100-year test already.
Since most century bonds aren't callable (meaning companies can't pay off investors early to get out of obligations), they are more attractive when a drop in rates causes price to rise.
That is why, despite the 100-year maturity, century bond offerings also attract short-term players.

Required:
Suppose that Dresser Industries issued its \($200\) million century bonds on January 1, 1996 at a market yield of 7.5%, the same as the stated interest rate. To keep things easy, also assume that the bonds pay interest just once a year, on December 31. Compute the bonds’

issue price. How much of that price comes from the present value of the interest payments, and how much comes from the promised principal payment?
. In present value terms, how much of a tax savings does the company get from its century bond? (Use a 40% effective tax rate.) How much of a tax savings would be lost if only the first 40 years of interest deductions were allowed?
. Suppose that the century bonds were issued with a stated rate of 7.5% when the market yield rate was 8.5%. What would the issue price be? How about if the market yield were 6.5%?
Suppose that Safra Republic issued its \($250\) million of millennium bonds on January 1, 1998 at a market yield of 7.125%, the same as the stated interest rate. Assume that the bonds pay interest just once a year, on December 31. What is the issue price of these bonds, and how much of that price comes from the present value of interest payments?
. Suppose that Safra Republic were a U.S. company paying taxes at a 40% rate. In present value terms, how much of a tax savings does the company receive from its millennium bonds? How much of a tax savings would be lost if only the first 40 years of interest deductions were allowed?
. Suppose that the millennium bonds were issued with a 7.125% stated interest rate when the market yield rate was 8.125%. What would the issue price be? How about if the market yield were 6.125%?
. Why would the Treasury Department be opposed to unlimited interest deductions on century and millennium bonds? According to U.S. GAAP, are these securities debt or equity?