7. [Fixed-rate versus variable-rate debt; effect of interest rate swap] Financial Federal [1] firances industrial and commer- cial equipment through installment sales and leasing pro- grams. FIF obtains funds from bank loans and bonds, which have the following interest rate characteristics (amounts in $thousands): Bank Loans Bonds July 31 1999 2000 1999 2000 Fixed rate $513.447 S671,791 $352.790 $440,490) Variable rate 117.362 Totals $630.809 111,019 $784,810 392,652 444,348 $745.442 $84.838 Fixed rate of total 81.4% 85.9 47 3 49 8 Direct financing leases 5317,918 $352.325 1otal finance receivables 948.727 1.137 135 (Note Assume that the direct financing leases have fixed interest rates.)

a. Discuss the effect of a rise in interest rates on the market value of FIF bonds (using the July 31, 2000 amounts).

b. Discuss the effect of a rise in interest rates on FIF's interest expense.

c. Considering your answers to parts a and

b, discuss why FIF has increased its fixed-rate debt from 17% at the end of fiscal 1996 to nearly 50% at the end of fiscal 2000.

d. FIF states that, because of the vanety and complexity of its fi- nance receivables, it is not practical to estimate fair value Given this statement, discuss the usefulness of the disclosure of the fair value of HIF debt.