Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the 2016 10-K report of Oracle Corporation.

$ millions May 31, 2016 May 31, 2015 Revolving credit agreements:

$3,750, LIBOR plus 0.35%, due June 2016. . . . . . . . . . . . . . . . . . . $ 3,750 $ —

Floating-rate senior notes:

$1,000, three-month LIBOR plus 0.20%, due July 2017 . . . . . . . . . 1,000 1,000

$500, three-month LIBOR plus 0.58%, due January 2019 . . . . . . . 500 500

$750, three-month LIBOR plus 0.51%, due October 2019 . . . . . . . 750750 Fixed-rate senior notes:

$2,000, 5.25%, due January 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,000

$2,500, 1.20%, due October 2017. . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500

$2,500, 5.75%, due April 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500

$1,500, 2.375%, due January 2019 . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 1,500

$1,750, 5.00%, due July 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750 1,750

$2,000, 2.25%, due October 2019. . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000

$1,000, 3.875%, due July 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000

€1,250, 2.25%, due January 2021 . . . . . . . . . . . . . . . . . . . . . . . . . 1,394 1,352

$1,500, 2.80%, due July 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 1,500

$2,500, 2.50%, due May 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500

$2,500, 2.50%, due October 2022. . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500

$1,000, 3.625%, due July 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000

$2,000, 3.40%, due July 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000

$2,500, 2.95%, due May 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500

€750, 3.125%, due July 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836810

$500, 3.25%, due May 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500

$1,750, 4.30%, due July 2034 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750 1,750

$1,250, 3.90%, due May 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250

$1,250, 6.50%, due April 2038. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250

$1,250, 6.125%, due July 2039 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250

$2,250, 5.375%, due July 2040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 2,250

$1,000, 4.50%, due July 2044 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000

$2,000, 4.125%, due May 2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000

$1,250, 4.375%, due May 2055 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250 Total senior notes and other borrowings . . . . . . . . . . . . . . . . . . . . . 43,980 42,162 Unamortized discount/issuance costs. . . . . . . . . . . . . . . . . . . . . . . (247) (278)

Hedge accounting fair value adjustments . . . . . . . . . . . . . . . . . . . . 122 74 Total notes payable and other borrowings. . . . . . . . . . . . . . . . . . . . 43,855 41,958 Notes payable and other borrowings, current . . . . . . . . . . . . . . . . . (3,750) (1,999)

Notes payable, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,105$39,959 Future principal payments (adjusted for the effects of the cross-currency swap agreements associated with the January 2021 Notes) for all of our borrowings at May 31, 2016 were as follows:

$ millions Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,750 Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 Fiscal 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Fiscal 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,655 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,336 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,241 Reproduced below is a summary of the market values as of December 2016 of select Oracle bonds (from Morningstar, www.morningstar.com).
Name Maturity Date Amount $ Price Coupon %
Yield to Maturity %
Oracle 2.95% . . . . . . . . . . . . . . . . . . 5/15/25 2,500 97.9 2.950 3.23 Oracle 4% . . . . . . . . . . . . . . . . . . . . 7/15/46 3,000 94.3 4.000 4.34 Oracle 4.375% . . . . . . . . . . . . . . . . . 5/15/55 1,250 93.2 4.375 4.76 Required

a. What is the amount of debt reported on Oracle’s May 31, 2016, 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. Oracle reported $1,467 million in interest expense in the notes to its 2016 income statement. In the note to its statement of cash flows, Oracle indicates that the cash portion of this expense is $1,616 million.
What could account for the difference between interest expense and interest paid? Explain.

c. Oracle’s long-term debt is rated A1 by Moody’s, A1 by S&P, and A1 by Fitch. What factors would be important to consider in attempting to quantify the relative riskiness of Oracle compared with other borrowers? Explain.

d. Oracle’s $3,000 million 4% notes traded at 94.3 or 94.3% of par, as of December 2016. What is the market value of these notes on that date? How is the difference between this market value and the $3,000 million face value reflected in Oracle’s financial statements? What effect would the repurchase of this entire note issue have on Oracle’s financial statements? What does the 94.3 price tell you about the general trend in interest rates since Oracle 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.