Study Guide Chapter1 14 Agricultural Economics 330 Instructor: David J. Leatham

Question 1 F What are the interest, principal and total payments on a $500 loan if the contractual rate is 10%, the loan will be paid back in four uniform principal payments at the end of the next four years, and the remaining balance method of calculating interest will be used?

Annual Principal Payment = 500/4 = 125

Question 2 F A farmer needs to borrow $40,000. The local Federal Land Bank will make a 30-year loan fully amortized at 9% with monthly payments. A $100 loan fee and stock purchase is required. The borrower stock requirement is the lesser of $1,000 or 2% of Loan Amount. Assume that sufficient money is borrowed to cover the $40,000, the fee and the stock purchase. Also assume that the stock is returned to borrower when the loan is paid off or refinanced. (remember that the 9% is an annual rate but the payments are monthly)

Question 2 -- Part A F How much money needs to be borrowed? P = L + F = 40, = 40, (1-s) (1-.02)

Question 2 -- Part B F What is the dollar amount of the stock requirement?

S =.02(40,918) = 818

Question 2 -- Part C F What is the monthly loan payment? Loan Payment (A) 40,918.37=A[USPV 0.75%,360 ] A= /12 =.0075 or 7.5% 12*30 = 360

Question 2 -- Part D F Suppose that the loan will be refinanced (paid-off) at the end of the fifth year. What is the actuarial, annual percentage, and the effective interest rate on this five year loan.

Book Value BV = [USPV.75%,300 ] = 39,232 Federal Land Bank

60 ? 40, ,414 i = 0.77% N i PV PMT FV ,000 r =? % Calculate Actuarial Rate (Yield) , ,000 = [USPV r,60 ] + (39, ) (1+r) ,000 = [USPV r,60 ] + 38,414 (1+r) -60

Calculate APR APR = * 12 = or 9.25% Calculate Effective Rate i e = [1+(0.0925/12)] = or 9.65%