At the beginning of 2002 Southwest Airlines issued ten-year notes with a face value of $385 million. The stated interest rate on the notes was 6.5 percent, and proceeds from the issuance approximated $380 million.
a. Estimate the effective interest rate of the issuance.
b. Compute the interest expense associated with this note recorded in 2002.
c. Explain why the market paid less than $385 million for these notes.