Excerpt from the multipage Note 7

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business. Although the letters of credit are an off-balance sheet item, the majority of obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $211 million at December 31, 2007.

The net book value of the assets pledged as collateral for the Companys secured borrowings, primarily aircraft and engines, was $660 million at December 31, 2007.

As of December 31, 2007, aggregate annual principal maturities of debt and capital leases (not including amounts associated with interest rate swap agreements and interest on capital leases) for the five-year period ending December 31, 2012, were $40 million in 2008, $42 million in 2009, $50 million in 2010, $44 million in 2011, $418 million in 2012, and $1.5 billion thereafter.

included Excerpted from Southwest Airlines, Inc. 10-K for year ended 12/31/2007

2007 2006 in millions

7 7/8 % Notes due 2007 $ - -

French Credit Agreements due 2012 32 37

6 % Notes due 2012 386 369

5 % Notes due 2014 352 336

5 % Notes due 2016 300 300

5 1/8 % Notes due 2017 311 300

French Credit Agreements 2017 94 100

Pass Through Certificates 480 --

7 3/8 % Debentures due 2027 103 100

Capital Leases (note 8) 52 63

2110 1705

Less Current maturities 41 16

Less debt discount and issuance costs 19 16

$ 2050 1567

Here is a copy of the credit report by Fitch Ratings, Ltd. at Southwests $385 million, 6.5% note issuance, due in 2012:

				Ratings
Maturity Date	Currency	Total Amount	Coupon Rate	Long-term	Short-term	CUSIP	ISIN
01-MAR-2012	USD	$385,000,000	6.5%	A	--	844741AV0	US844741AV08

Here is a price quote on those same Southwest notes at the date of issuance:

Ratings	Ticker	Description	Coupon	Maturity	YTC/YTM	Price
Baa/A	LUV	Southwest Airls Co	6.500	03-01-2012	7.450	97.29

1-4. What is the value of these notes at the 2007 balance sheet date? Read the excerpt from

Note 10.

Prior to 2007, the Company had entered into interest rate swap agreements relating to its $385 million 6.5% senior unsecured notes due 2012 and Under each of these interest rate swap agreements, the Company pays the London InterBank Offered Rate (LIBOR) plus a margin every six months on the notional amount of the debt [what amounts to the market price of the debt], and receives payments based on the fixed stated rate of the notes every six months until the date the notes become due [this is why it is called a swap]. Under the agreement related to its $385 million 6.5% senior unsecured notes due 2012, the average floating rate paid during 2007 is estimated to be 7.31 percent based on actual and forward rates at December 31, 2007.

The primary objective for the Companys use of interest rate hedges is to reduce the volatility of net interest income by better matching the repricing of its assets and liabilities. The Companys interest rate swap agreements qualify as fair value hedges, as defined by SFAS 133. The fair values of the interest rate swap agreements, which are adjusted regularly, are recorded in the Consolidated Balance Sheet, as necessary, with a corresponding adjustment to the carrying value of the long-term debt. The fair value of the interest rate swap agreements, excluding accrued interest, at December 31, 2007, was an asset of approximately $16 million and is recorded in Other deferred liabilities in the Consolidated Balance Sheet. In accordance with fair value hedging, the offsetting entry is an adjustment to increase the carrying value of long-term debt. See Note 7. [we will discuss the accounting for fair value hedges (and cash flow hedges) in International Accounting]

1-5. So what has happened to the general trend of interest rates between the date of issuance and the end of 2007? How can you tell? What was the market rate at issuance for notes of equivalent risk?

1-6. Why might Southwest pay off these notes back before maturity? What effect would a repurchase at the 12/31/07 market rate (ignoring the interest rate swap) have on Southwests major financial statements?