Determining Bond Prices, Interest Rates, and Financial Statement Effects Assume Deere & Company's 2012 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 7.85% debentures due 2015 6.95% notes due 2019: ($700 principal) Swapped to variable interest rates of 6.196-2012. 6.4% -2011 8.95% debentures due 2019 8-1/2 % debentures due 2022 6.55% debentures due 2028 8.10% debentures due 2030 7.125% notes due 2031 Other notes Total Type Issuer Price Corp Deere & CO 133.63 2012 $ 306 743 A recent price quote (from Yahoo! Finance Bond Center) on Deere's 7.125% notes follows. Coupon YTM Current Fitch (96) Maturity (%) Yield (%) Rating Callable 7.125 3-Mar-2031 4.678 5.332 A No OThere is not enough information. Ointerest rates have increased. Ointerest rates have declined. 2011 $ 306 734 56 105 200 56 105 200 250 300 13 $ 1,973 $ 1,969 250 300 18 This price quote indicates that Deere's 7.125 % notes have a market price of 133.63 (133.63% of face value), resulting in a yield to maturity of 4.678%. (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.) Ointerest rates have remained the same. (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. ONO, the change in interest rates since Deere issued the notes does not affect interest expense. OThe change in interest rates only affects the required payment on the liability and, thus, cash flow.