Determining Bond Prices, Interest Rates, and Financial Statement Effects Assume Deere & Company's 2012 10-K reports the following footnote relating to long-term debt. Deere's borrowings include 5250 million, 7.125% notes, due in 2031 bolded below. Long-term borrowings at October 31 consisted of the following in millions of dollars: Notes and Debentures 2012 2011 7.85% debentures due 2015 6.95% notes due 2019: ($700 principal) Swapped to variable interest rates of 6.1%-2012, 6.4%-2011 734 8.95% debentures due 2019 B-1/2 debentures due 2022 105 6.55% debentures due 2028 200 200 8.10% debentures due 2030 250 7.125% notes due 2031 250 250 Other notes Total $ 1,973 $ 1.969 105 250 A recent price quote (from Yahoo! Finance Bond Center) on Deere's 7.125% notes follows. Coupon YTM Current Fitch Type Issuer Price Maturity (%) Yield (%) Rating Callable Corp Deere & CO 134.46 7.125 3-Mar-2031 4.628 5.299 A This price quote indicates that Deere's 7.125% notes have a market price of 134.46 (134.46% of face value), resulting in a yield to maturity of 4.648%. (a) Assuming that these notes were originally issued at par value, what does the market price reveal about interest rate changes since Deere issued its notes? (Assume that Deere's credit rating has remained the same.) Interest rates have increased Cinterest rates have remained the same. Interest rates have declined. There is not enough information (b) Does the change in interest rates since the issuance of these notes affect the amount of interest expense that Deere reports in its income statement? Explain. No, the change in interest rates since Deere issued the notes does not affect interest expense. Yes, the decline in interest rates results in a decline in interest expense. Because accounting is inherently conservative, declines in interest rates are not reflected in a reduction of interest expense. However, the increase in interest expense resulting from an! increase in rates is recognized. The change in interest rates only affects the required payment on the liability and, thus, cash flow. (c) How much cash would Deere have to pay to repurchase the 7.125% notes at the quoted market price of 134.46. (Assume no interest is owed when Deere repurchases the notes.) Round your answer to two decimal places. million How would the repurchase affect Deere's current income? The repurchase would result in a loss on repurchase of debentures, which would lower current income. cash and bonds payable both decrease by the same amount. No gain or loss is recognized The repurchase only affects cash flow, not income Income is not affected because the liability has been reported at fair value since inception. As a result, the repurchase price is equal to the book value and no gain or loss is recognized (d) Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 20312 $ million