Interpreting Debt Footnotes on Interest Rates and Interest Expense CVS Health Corporation discloses the following as part of its long-term debt footnote in its 2015 10-K.

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The following table is a summary of the Company’s borrowings as of December 31:

????n millions 2015 2014 Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 685 3.25% senior notes due 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 550 1.2% senior notes due 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 750 6.125% senior notes due 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 421 5.75% senior notes due 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 1,080 1.9% senior notes due 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,250 —

2.25% senior notes due 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250 2.25% senior notes due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 850 6.6% senior notes due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 394 2.8% senior notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 —

4.75% senior notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 450 4.125% senior notes due 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550 550 2.75% senior notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250 3.5% senior notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 —

4.75% senior notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 —

4% senior notes due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,250 3.375% senior notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650 650 5% senior notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 —

3.875% senior notes due 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 —

6.25% senior notes due 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 453 3.25% senior exchange debentures due 2035 . . . . . . . . . . . . . . . . . . 5 —

4.875% senior notes due 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000—

6.125% senior notes due 2039 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 734 5.75% senior notes due 2041 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 493 5.3% senior notes due 2043 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 750 5.125% senior notes due 2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 —

Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644 391 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 41 Total debt principal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,694 12,992 Debt premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 —

Debt discounts and deferred financing costs . . . . . . . . . . . . . . . . . . . (269) (102)

27,464 12,890 Less:

Short-term debt (commercial paper) . . . . . . . . . . . . . . . . . . . . . . . . . . —(685)

Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,197) (575)

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,267 $11,630 CVS discloses its required principal debt repayments due during each of the next five years and thereafter.
In millions 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,197 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,113 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,521 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,266 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,224 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,373 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,694 CVS also discloses the following information.
Interest expense, net—Interest expense, net of capitalized interest, was $859 million, $615 million and $517 million, and interest income was $21 million, $15 million and $8 million in 2015, 2014 and 2013, respectively. Capitalized interest totaled $12 million, $19 million and $25 million in 2015, 2014 and 2013, respectively. Interest paid totaled $629 million, $647 million, and $534 million in 2015, 2014, and 2013 respectively.
The price of the 6.125% senior note due 2039 as of May 2016 follows (from ????????????oo????????????????n????nce).
Maturity Date Issuer Security Type Coupon Current Price Current Yield Fitch Rating Callable 2039 CVS Health (NYSE: CVS)
Corporate Debentures 6.125 126.13 4.856 BBB No Required ???????? What is the average coupon rate (interest paid) on the long-term debt? (????????????t???? Use the interest expense disclosures.)
???????? Does your computation of the coupon rate in part ???? seem reasonable given the footnote disclosure relating to specific bond issues? Explain.
c???? What is the average effective rate (interest expense) on the long-term debt? Explain how the amount of interest paid can differ from the amount of interest expense recorded in the income statement.
d???? On its 2015 balance sheet, CVS reports current maturities of long-term debt of $1,197 million as part of short-term debt. Why is this amount reported that way? Is this amount important to our analysis of CVS? Explain.
e???? The $1,500 million 6.125% senior note due in 2039 is priced at 126.13 (126.13% of face value, or $1,891.95 million) as of 2016, resulting in a current yield of 4.856%. Assuming that the credit rating of CVS has not changed, what does the pricing of this 6.125% coupon bond imply about interest rate changes since CVS issued the bond?