19. [Market value of debt versus book value; interest rate sensi- tivity] AMR [AMR] is the parent company of American Air- lines. Exhibit 10P-2 contains extracts from Note 6 of AMR'S 1999 annual report

a. Based on the fair value data, state whether the long-term rates used to determine fair value rose or fell in 1999. Justify your choice

b. State whether the interest rate used to determine the fair value of the $437 million "9.0%-10 20% debentures" (due through 2021) at December 31, 1999 was (i) Below 10.20%, (ii) Above 10.20% Justify your choice.

c. Explain why the fair value of the $86 million variable-rate in- debtedness equals the carrying value for both years. 201. [Interest rate swaps; extension of Problem 10-19] Exhibit 10P-2 also describes interest rate swaps that AMR entered into.

a. Describe the effect of the interest rate swaps on AMR's inter- est expense for both 1998 and 1999

b. Explain why the fair value of the swaps was positive in 1998 but negative in 1999. Elsewhere in its 1999 financial report. AMR states that: Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical