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Determining Bond Prices, Interest Rates, and Financial Statement Effects Deere & Company's 2010 10-K reports the following footnote relating to long-term debt. Deere's borrowings include $300 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 6.95% notes due 2014: ($700 principal) Swapped $300 to variable interest rate of 1.25%2009 4.375% notes due 2019 8-1/2% debentures due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 Other notes Total 2010 2009 $763 $ 800 750 750 105 105 200 200 500 250 250 300 300 168 $3,329 $3,073 500 461 A recent price quote (from Yahoo! Finance Bond Center) on Deere's 7.125% notes follows. Type Issuer Price Corp Deere & CO 131.84 Coupon YTM Current Fitch (%) Maturity (%) Yield (%) Rating Callable 7.125 2031 4.650 5.404 A No This price quote indicates that Deere's 7.125% notes have a market price of 131.84 (131.84% of face value), resulting in a yield to maturity of 4.65%. (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.) Olnterest rates have increased. OThere is not enough information. Olnterest rates have remained the same. Olnterest rates have declined. (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. OYes, the decline in interest rates results in a decline in interest expense. OBecause 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 OThe change in interest rates only affects the required payment on the liability and, thus, cash flow. No, the change in interest rates since Deere issued the notes does not affect interest expense. (c) How much cash would Deere have to pay to repurchase the 7.125% notes at the quoted market price of 131.84? (Assume no interest is owed when Deere repurchases the notes.) Round your answer to two decimal places. $ 395.52 million How would the repurchase affect Deere's current income? OCash and bonds payable both decrease by the same amount. No gain or loss is recognized. Olncome 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. OThe repurchase would result in a loss on repurchase of debentures, which would lower current income. OThe repurchase only affects cash flow, not income. (d) Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 2031? $ 398.2 x million

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