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Convertible Notes

In July 2010, we issued $1.3 billion of Convertible Notes due in May 2016 in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. In 2016 and 2015, portions of the Convertible Notes were converted and on May 1, 2016, the remainder matured. We repaid an aggregate principal balance of $285 million and $213 million during 2016 and 2015, respectively. We also paid in cash $956 million and $784 million during 2016 and 2015, respectively, related to the conversion spread of the Convertible Notes, which represents the conversion value in excess of the principal amount. We received $956 million and $784 million in cash during 2016 and 2015, respectively, from our convertible note hedges related to the Convertible Notes. During 2015, a portion of the warrants related to the Convertible Notes was modified and settled, and in August 2016, the remainder expired. We paid $469 million and $3.9 billion during 2016 and 2015, respectively, to settle the warrants as the average market price of our common stock exceeded the warrants exercise price.

The Convertible Notes were issued at par and bore an annual interest rate of 1.625%. The initial conversion rate for the Convertible Notes was 44.0428 shares per $1,000 principal amount (which represented an initial conversion price of approximately $22.71 per share). The conversion rates were subject to customary anti-dilution adjustments, including quarterly dividend distributions. Upon conversion or maturity, a holder received an amount in cash equal to the lesser of (i) the principal amount of the note or (ii) the conversion value for such note, as measured under the indenture governing the relevant notes. If the conversion value exceeded the principal amount, we delivered, at our option, cash or common stock or a combination of cash and common stock for the conversion value in excess of the principal amount.

There were 55 million shares of our common stock underlying the warrants associated with our Convertible Notes. The warrants had an original exercise price of $30.05 per share, subject to customary anti-dilution adjustments including quarterly dividend distributions. In 2015, we entered into modified agreements with our warrant counterparties which changed the timing of the expiration for 46 million of the warrants. The modified agreements allowed us to settle the 46 million warrants at our option, in cash or shares. According to the terms of the modified agreements, these warrants expired during a 32 trading-day period which commenced on May 11, 2015 and ended on June 24, 2015. We exercised our option to settle the warrants in cash. In 2016, the remaining 9 million warrants expired during a 40 trading-day period commencing on August 1, 2016 and ending on September 26, 2016. We exercised our option to settle the remaining warrants in cash. Because these warrants could have been settled at our option, in cash or shares of common stock, under both the original and the modified agreements and these contracts met all of the applicable criteria for equity classification, the settlement payments were recorded as a reduction to Stockholders equity on our Consolidated Balance Sheets.

In March 2016, we exercised our option to elect cash for the settlement of the conversion spread of the remaining Convertible Notes and for the related convertible note hedges. As a result, the Convertible Notes and the related convertible note hedges were accounted for as derivative instruments with fair values classified as liability or asset on our Consolidated Balance Sheets (see Note 4, Derivative Financial Instruments).

Until our cash settlement election, we bifurcated the conversion option of the Convertible Notes from the debt instrument, classified the conversion option in equity and accreted the resulting debt discount as interest expense over the contractual terms of the Convertible Notes. The following table summarizes information about the equity and liability components of the Convertible Notes (in millions):

		Carrying Value of Equity Component								Net Carrying Amount of Liability Component								Unamortized Discount of Liability Component
		December 31,								December 31,								December 31,
		2016				2015				2016				2015				2016				2015
Convertible Notes		$				$	35			$				$	283			$				$	(2	)

We recognized interest expense of $3 million in 2016, $16 million in 2015 and $35 million in 2014 related to the contractual coupon rate and amortization of the debt discount and issuance cost for the Convertible Notes. The effective interest rate on the liability components of Convertible Notes was 4.00%.

1. Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions).
2. Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions). What is the Amortization of discount?
3. Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions). What is the cash?
4. How were the warrants classified on issuance?
   1. As a component of the convertible debt
   2. As a separate liability
   3. As a contra-equity
   4. As a component of equity