Long-term debt


Notes to Financial Statements

NOTE 11    DEBT

As of September 30, 2012, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $12.0 billion and $13.3 billion, respectively. This is compared to a carrying value and estimated fair value of $11.9 billion and $13.2 billion, respectively, as of June 30, 2012. These estimated fair values are based on Level 2 inputs.

 

The components of our long-term debt, including the current portion, and the associated interest rates were as follows as of both September 30, 2012 and June 30, 2012:

 

Due Date    Face Value    

Stated
Interest

Rate

    

Effective
Interest

Rate

 


     (In millions)               
Notes                    

September 27, 2013

   $ 1,000        0.875%         1.000%   

June 1, 2014

     2,000        2.950%         3.049%   

September 25, 2015

     1,750        1.625%         1.795%   

February 8, 2016

     750        2.500%         2.642%   

June 1, 2019

     1,000        4.200%         4.379%   

October 1, 2020

     1,000        3.000%         3.137%   

February 8, 2021

     500        4.000%         4.082%   

June 1, 2039

     750        5.200%         5.240%   

October 1, 2040

     1,000        4.500%         4.567%   

February 8, 2041

     1,000        5.300%         5.361%   


                

Total

     10,750                    
Convertible Debt                    

June 15, 2013

     1,250        0.000%         1.849%   


                

Total

   $   12,000                    
    


                

Interest on the notes is paid semi-annually. As of September 30, 2012 and June 30, 2012, the aggregate unamortized discount for our long-term debt, including the current portion, was $50 million and $56 million, respectively.

Notes

The Notes are senior unsecured obligations and rank equally with our other unsecured and unsubordinated debt outstanding.

Convertible Debt

In June 2010, we issued $1.25 billion of zero coupon convertible unsecured debt due on June 15, 2013 in a private placement offering. Proceeds from the offering were $1.24 billion, net of fees and expenses, which were capitalized. Initially, each $1,000 principal amount of notes was convertible into 29.94 shares of Microsoft common stock at a conversion price of $33.40 per share. The conversion ratio is adjusted periodically for dividends in excess of the initial dividend threshold as defined in the debt agreement. As of September 30, 2012, the net carrying amount of our convertible debt was $1.2 billion and the unamortized discount was $14 million.

Prior to March 15, 2013, the notes will be convertible, only in certain circumstances, into cash and, if applicable, cash, shares of Microsoft’s common stock, or a combination thereof, at our election. On or after March 15, 2013, the notes will be convertible at any time. Upon conversion, we will pay cash up to the aggregate principal amount of the notes and pay or deliver cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.

Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. The net proceeds of $1.24 billion were allocated between debt for $1.18 billion and stockholders’ equity for $58 million with the portion in stockholders’ equity representing the fair value of the option to convert the debt.

 

In connection with the issuance of the notes, we entered into capped call transactions with certain option counterparties who are initial purchasers of the notes or their affiliates. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the notes. Under the capped call transactions, we purchased from the option counterparties capped call options that in the aggregate relate to the total number of shares of our common stock underlying the notes, with a strike price equal to the conversion price of the notes and with an initial cap price equal to $37.16, which is adjusted periodically to mirror any adjustments to the conversion price. The purchased capped calls were valued at $40 million and recorded to stockholders’ equity.