Interpreting Liability Disclosures
Yellow Jacket Company, which manufactures imaging and health products for commercial and medical customers, included the following information in a note describing its long term debt:
|
Long term debt (partial) |
|
|
Issue: |
(Dollars in Millions) |
|
10.05% notes due 1999 |
$ 350 |
|
77/8% notes due 2001 |
135 |
|
8.55% notes due 2000 |
200 |
|
63/8% convertible debentures due 2001 |
278 |
|
Zero coupon convertible debentures due 2011 |
|
|
($3,680 face value) |
1,127 |
Required
a. Why do the interest rates differ among the various debt issues reported by Yellow Jacket?
b. Why is information on these due dates useful to a financial analyst?
c. Assume that the prevailing market interest rate is 8.25% at the balance sheet date, and that each of the first four issues listed was initially issued at par (face) value. Which of these liabilities will have a current market value above par? Which issues would have a market value below par value?
d. If Yellow Jacket’s managers or board of directors wished to report a gain on early debt retirement. Which of these liabilities (see part c) will be retired first? Why?
e. Why would lenders be willing to invest in zero coupon bonds (bonds that do not pay periodic interest)?