Analyzing Debt Terms, Yields, Prices, and Credit Ratings Reproduced below is the debt footnote from the May 31, 2019, 10-K report of Oracle Corporati $ millions May 31, 2019 May 31, 2018 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 1,500 1,750 1,750 2,000 2,000 $1,000, 3.875%, due July 2020 1,000 1,000 1,250, 2.25%, due January 2021 1,393 1,446 $1,500, 2.80%, due July 2021 1,500 1,500 $4,250, 1.90 %, due September 2021 4,250 4,250 $2,500, 2.50%, due May 2022 2,500 2,500 $2,500, 2.50%, due October 2022 2,500 2,500 $1,250, 2.625 %, due February 2023 1,250 1,250 $1,000, 3.625%, due July 2023 1,000 1,000 $2,500, 2.40%, due September 2023 2,500 2,500 $2,000, 3.40%, due July 2024 2,000 2,000 $2,000, 2.95%, due November 2024 2,000 2,000 $2,500, 2.95%, due May 2025 2,500 2,500 750, 3.125%, due July 2025 836 868 $3,000, 2.65%, due July 2026 3,000 3,000 $2,750, 3.25%, due November 2027 2,750 2,750 $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, 3.85%, due July 2036 1,250 1,250 $1,750, 3.80%, due November 2037 1,750 1,750 $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 $3,000, 4.00 %, due July 2046 $2,250, 4.00 %, due November 2047 $1,250, 4.375%, due May 2055 Floating-rate senior notes: $500 three-month IIBOR plus 0 58% due January 2019 2,000 2,000 3,000 3,000 2,250 2,250 1,250 1,250 500 Floating-rate senior notes: $500, three-month LIBOR plus 0.58%, due January 2019 $750, three-month LIBOR plus 0.51%, due October 2019 Revolving credit agreements and other borrowings: $2,500, LIBOR plus 0.50%, due June 2018 Other borrowings due August 2025 Total senior notes and other borrowings Unamortized discount/issuance costs Hedge accounting fair value adjustments(1)(4) Total notes payable and other borrowings Notes payable and other borrowings, current Notes payable and other borrowings, noncurrent 500 750 750 2,500 113 113 56,342 60,927 (202) (282) 27 (26) 56,167 60,619 4,494 $51,673 4,491 $56,128 Future principal payments (adjusted for the effects of the cross-currency swap agreements associated with the January 2021 No $ millions Fiscal 2020 $4,500 Fiscal 2021 2,631 Fiscal 2022 8,250 Fiscal 2023 3,750 Fiscal 2024 3,500 Thereafter Total 33,984 $56,615 Reproduced below is a summary of the market values as of August 10, 2019, of select Oracle bonds. Source: Markets Insider (ht Maturity Yield to Maturity % Date Amount $ Price Coupon % 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 2022 $ million million $ million 2023 $ million What are the scheduled maturities for this indebtedness? 2020 $ million 2021 $ million 2022 $ million 2023 $ million 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. Owe 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. Owe 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 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 ris Ocredit rating agencies assess companies' default risk by focusing primarily on macroeconomic factors such as the projected level of interest rates. Ocredit 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-ter Ocredit rating agencies assess companies' default risk by comparing the target company against companies that have defaulted on their debt. Ocredit 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? OThe 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 if rates have declined (increased). Oonly the statement of cash flows is affected as cash is needed to retire the liabilities when they mature. OThe 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. OOracle is prohibited from repurchasing the notes before maturity and, thus, no financial statements would be affected. Oonly 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? The 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. OBecause 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 gener 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.