Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the May 31, 2019, 10-K report of Oracle Corporation. May 31, 2019 May 31, 2018 1,750 2,000 1,000 1,393 1,500 4,250 2,500 2,500 1,250 1,000 2,500 2,000 2,000 1,500 1,750 2,000 1,000 1,446 1,500 4,250 2,500 2,500 1,250 1,000 2,500 2,000 2,000 $ millions Fixed-rate senior notes: $1,500, 2.375%, due January 2019 $1,750, 5.00%, due July 2019 $2,000, 2.25%, due October 2019 $1,000, 3.875%, due July 2020 1,250, 2.25%, due January 2021 $1,500, 2.80%, due July 2021 $4,250, 1.90%, due September 2021 $2,500, 2.50%, due May 2022 $2,500, 2.50%, due October 2022 $1,250, 2.625%, due February 2023 $1,000, 3.625%, due July 2023 $2,500, 2.40%, due September 2023 $2,000, 3.40%, due July 2024 $2,000, 2.95%, due November 2024 $2,500, 2.95%, due May 2025 750, 3.125%, due July 2025 $3,000, 2.65%, due July 2026 $2,750, 3.25%, due November 2027 $500, 3.25%, due May 2030 $1,750, 4.30%, due July 2034 $1,250, 3.90%, due May 2035 $1,250, 3.85%, due July 2036 $1,750, 3.80%, due November 2037 $1,250, 6.50%, due April 2038 $1,250, 6.125%, due July 2039 $2,250, 5.375%, due July 2040 $1,000, 4.50%, due July 2044 $2,000, 4.125%, due May 2045 $3,000, 4.00%, due July 2046 $2,250, 4.00%, due November 2047 $1,250, 4.375%, due May 2055 2,500 2,500 868 836 3,000 3,000 2,750 500 1,750 1,250 1,250 1,750 1,250 1,250 2,250 1,000 2,000 3,000 2,250 2,750 500 1,750 1,250 1,250 1,750 1,250 1,250 2,250 1,000 2,000 3,000 2,250 1,250 1,250 Floating-rate senior notes: $500, three-month LIBOR plus 0.58%, due January 2019 500 $750, three-month LIBOR plus 0.51%, due October 2019 750 750 Revolving credit agreements and other borrowings: $2,500, LIBOR plus 0.50%, due June 2018 2,500 Other borrowings due August 2025 113 113 Total senior notes and other borrowings 56,342 60,927 Unamortized discount/issuance costs (202) (282) Hedge accounting fair value adjustments(1)(4) 27 (26) Total notes payable and other borrowings 56,167 60,619 Notes payable and other borrowings, current 4,494 4,491 Notes payable and other borrowings, noncurrent $51,673 $56,128 Future principal payments (adjusted for the effects of the cross-currency swap agreements associated with the January 2021 Notes and July 2025 Notes) for all of our borrowings at May 31, 2019, were as follows: $ millions Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 $4,500 2,631 8,250 3,750 3,500 33,984 $56,615 Fiscal 2024 Thereafter Total Reproduced below is a summary of the market values as of August 10, 2019, of select Oracle bonds. Source: Markets Insider (https://markets.businessinsider.com/bonds). Maturity Yield to Date Amount $ Price Coupon % Maturity % July 2020 $1,000 109.47 3.875 2.613 April 2038 $1,250 136.78 6.5 3.36 July 2039 $1,250 120.47 6.125 3.45 (a) What is the amount of debt reported on Oracle's May 31, 2019, balance sheet? $ million What are the scheduled maturities for this indebtedness? 2020 $ 2021 $ million million million million 2022 $ 2023 $ 2024 $ million Thereafter $ million Why is information relating to a company's scheduled maturities of debt useful in an analysis of its financial condition? OExcessive payments in any one year can create a cash flow problem, especially if the debt cannot be refinanced. We prefer to see liabilities coming due in the near future if interest rates are expected to decline; but deferred if interest rates are expected to increase. OThe information relating to a company's scheduled maturities is not important. We are looking to see if all payments are approximately equal. If so, the expected drain on cash flow will be constant. (b) Oracle reported $2,082 million in interest expense in the notes to its 2019 income statement. In the note to its statement of cash flows, Oracle indicates that the cash portion of this expense is $2,059 million. What could account for the difference between interest expense and interest paid? OThe difference arises from the amortization of any discounts or premiums on the debt. OThe difference arises because the amount of interest paid is based on prevailing interest rates that change frequently. OThe difference arises because the amount of interest expense is based on prevailing interest rates that change frequently. OThere is never any difference between interest expense and interest paid. (c) Oracle's long-term debt is rated A1 by Moody's A+ by S&P Global Ratings, and A+ by Fitch. What factors would be important to consider in attempting to quantify the relative riskiness of Oracle compared with other borrowers? Credit rating agencies assess companies' default risk by focusing primarily on macroeconomic factors such as the projected level of interest rates. Credit rating agencies assess companies' default risk by gauging the level of debt in relation to the companies' operating cash flow, profitability ratios, and the ratios for long-term creditworthiness. Credit rating agencies assess companies' default risk by comparing the target company against companies that have defaulted on their debt. Credit rating agencies assess companies' default risk by focusing primarily on non-quantitative measures such as the quality of the company's management team. (d) Oracle's $1,250 million 6.5% notes traded at 136.78 as of August 10, 2019. What is the market value of these notes on that date? (Round your answer to the nearest whole number.) $ million How is the difference between this market value and the $1,250 million face value reflected in Oracle's financial statements? The balance sheet is unaffected, but the income statement reflects increases (decreases) in interest rates as increases (decreases) in interest expense. OThe current market value of the notes is reflected in the balance sheet as an increase (decrease) in liabilities rates have declined (increased). Only the statement of cash flows is affected as cash is needed to retire the liabilities when they mature. The current market value of the notes is not reflected in Oracle's balance sheet. What effect would the repurchase of this entire note issue have on Oracle's financial statements? Othere would be no effect on the financial statements if Oracle were to repurchase these notes because the repurchase would be made at book value. Oracle is prohibited from repurchasing the notes before maturity and, thus, no financial statements would be affected. Only the balance sheet and statement of cash flows would be affected as they reflect the cash payment and consequent reduction of liabilities. Olf Oracle were to repurchase these notes, the difference would be reported as a loss in the current income statement. What does the 136.78 price tell you about the general trend in interest rates since Oracle sold this bond issue? OThe price of the bonds is unrelated to the general level of interest rates, only the rate of interest on Oracle's debt. Because that hasn't changed, other causes must be considered. Because these notes have increased in value subsequent to their issuance, market interest rates must have decreased. OThe market price of the debt relates only to investor's expectations about the general condition of the airline industry and is unaffected by the level of interest rates. OBecause these notes have declined in value subsequent to their issuance, market interest rates must have increased. (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. OThe table generally reveals the following relation: the longer the time to maturity, the higher the yield. Typically, there is an increasing relation between the term period of the debt and its yield. OThe table generally reveals the following relation: the shorter the time to maturity, the higher the yield. Typically, there is an inverse relation between the term period of the debt and its yield. Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the May 31, 2019, 10-K report of Oracle Corporation. May 31, 2019 May 31, 2018 1,750 2,000 1,000 1,393 1,500 4,250 2,500 2,500 1,250 1,000 2,500 2,000 2,000 1,500 1,750 2,000 1,000 1,446 1,500 4,250 2,500 2,500 1,250 1,000 2,500 2,000 2,000 $ millions Fixed-rate senior notes: $1,500, 2.375%, due January 2019 $1,750, 5.00%, due July 2019 $2,000, 2.25%, due October 2019 $1,000, 3.875%, due July 2020 1,250, 2.25%, due January 2021 $1,500, 2.80%, due July 2021 $4,250, 1.90%, due September 2021 $2,500, 2.50%, due May 2022 $2,500, 2.50%, due October 2022 $1,250, 2.625%, due February 2023 $1,000, 3.625%, due July 2023 $2,500, 2.40%, due September 2023 $2,000, 3.40%, due July 2024 $2,000, 2.95%, due November 2024 $2,500, 2.95%, due May 2025 750, 3.125%, due July 2025 $3,000, 2.65%, due July 2026 $2,750, 3.25%, due November 2027 $500, 3.25%, due May 2030 $1,750, 4.30%, due July 2034 $1,250, 3.90%, due May 2035 $1,250, 3.85%, due July 2036 $1,750, 3.80%, due November 2037 $1,250, 6.50%, due April 2038 $1,250, 6.125%, due July 2039 $2,250, 5.375%, due July 2040 $1,000, 4.50%, due July 2044 $2,000, 4.125%, due May 2045 $3,000, 4.00%, due July 2046 $2,250, 4.00%, due November 2047 $1,250, 4.375%, due May 2055 2,500 2,500 868 836 3,000 3,000 2,750 500 1,750 1,250 1,250 1,750 1,250 1,250 2,250 1,000 2,000 3,000 2,250 2,750 500 1,750 1,250 1,250 1,750 1,250 1,250 2,250 1,000 2,000 3,000 2,250 1,250 1,250 Floating-rate senior notes: $500, three-month LIBOR plus 0.58%, due January 2019 500 $750, three-month LIBOR plus 0.51%, due October 2019 750 750 Revolving credit agreements and other borrowings: $2,500, LIBOR plus 0.50%, due June 2018 2,500 Other borrowings due August 2025 113 113 Total senior notes and other borrowings 56,342 60,927 Unamortized discount/issuance costs (202) (282) Hedge accounting fair value adjustments(1)(4) 27 (26) Total notes payable and other borrowings 56,167 60,619 Notes payable and other borrowings, current 4,494 4,491 Notes payable and other borrowings, noncurrent $51,673 $56,128 Future principal payments (adjusted for the effects of the cross-currency swap agreements associated with the January 2021 Notes and July 2025 Notes) for all of our borrowings at May 31, 2019, were as follows: $ millions Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 $4,500 2,631 8,250 3,750 3,500 33,984 $56,615 Fiscal 2024 Thereafter Total Reproduced below is a summary of the market values as of August 10, 2019, of select Oracle bonds. Source: Markets Insider (https://markets.businessinsider.com/bonds). Maturity Yield to Date Amount $ Price Coupon % Maturity % July 2020 $1,000 109.47 3.875 2.613 April 2038 $1,250 136.78 6.5 3.36 July 2039 $1,250 120.47 6.125 3.45 (a) What is the amount of debt reported on Oracle's May 31, 2019, balance sheet? $ million What are the scheduled maturities for this indebtedness? 2020 $ 2021 $ million million million million 2022 $ 2023 $ 2024 $ million Thereafter $ million Why is information relating to a company's scheduled maturities of debt useful in an analysis of its financial condition? OExcessive payments in any one year can create a cash flow problem, especially if the debt cannot be refinanced. We prefer to see liabilities coming due in the near future if interest rates are expected to decline; but deferred if interest rates are expected to increase. OThe information relating to a company's scheduled maturities is not important. We are looking to see if all payments are approximately equal. If so, the expected drain on cash flow will be constant. (b) Oracle reported $2,082 million in interest expense in the notes to its 2019 income statement. In the note to its statement of cash flows, Oracle indicates that the cash portion of this expense is $2,059 million. What could account for the difference between interest expense and interest paid? OThe difference arises from the amortization of any discounts or premiums on the debt. OThe difference arises because the amount of interest paid is based on prevailing interest rates that change frequently. OThe difference arises because the amount of interest expense is based on prevailing interest rates that change frequently. OThere is never any difference between interest expense and interest paid. (c) Oracle's long-term debt is rated A1 by Moody's A+ by S&P Global Ratings, and A+ by Fitch. What factors would be important to consider in attempting to quantify the relative riskiness of Oracle compared with other borrowers? Credit rating agencies assess companies' default risk by focusing primarily on macroeconomic factors such as the projected level of interest rates. Credit rating agencies assess companies' default risk by gauging the level of debt in relation to the companies' operating cash flow, profitability ratios, and the ratios for long-term creditworthiness. Credit rating agencies assess companies' default risk by comparing the target company against companies that have defaulted on their debt. Credit rating agencies assess companies' default risk by focusing primarily on non-quantitative measures such as the quality of the company's management team. (d) Oracle's $1,250 million 6.5% notes traded at 136.78 as of August 10, 2019. What is the market value of these notes on that date? (Round your answer to the nearest whole number.) $ million How is the difference between this market value and the $1,250 million face value reflected in Oracle's financial statements? The balance sheet is unaffected, but the income statement reflects increases (decreases) in interest rates as increases (decreases) in interest expense. OThe current market value of the notes is reflected in the balance sheet as an increase (decrease) in liabilities rates have declined (increased). Only the statement of cash flows is affected as cash is needed to retire the liabilities when they mature. The current market value of the notes is not reflected in Oracle's balance sheet. What effect would the repurchase of this entire note issue have on Oracle's financial statements? Othere would be no effect on the financial statements if Oracle were to repurchase these notes because the repurchase would be made at book value. Oracle is prohibited from repurchasing the notes before maturity and, thus, no financial statements would be affected. Only the balance sheet and statement of cash flows would be affected as they reflect the cash payment and consequent reduction of liabilities. Olf Oracle were to repurchase these notes, the difference would be reported as a loss in the current income statement. What does the 136.78 price tell you about the general trend in interest rates since Oracle sold this bond issue? OThe price of the bonds is unrelated to the general level of interest rates, only the rate of interest on Oracle's debt. Because that hasn't changed, other causes must be considered. Because these notes have increased in value subsequent to their issuance, market interest rates must have decreased. OThe market price of the debt relates only to investor's expectations about the general condition of the airline industry and is unaffected by the level of interest rates. OBecause these notes have declined in value subsequent to their issuance, market interest rates must have increased. (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. OThe table generally reveals the following relation: the longer the time to maturity, the higher the yield. Typically, there is an increasing relation between the term period of the debt and its yield. OThe table generally reveals the following relation: the shorter the time to maturity, the higher the yield. Typically, there is an inverse relation between the term period of the debt and its yield