Study Guide Chapter1 14

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Study GuideChapter1 14

• Agricultural Economics 330
• Instructor David J. Leatham

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Question 1

• 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?

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Annual Principal Payment 500/4 125
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Question 2

• 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)

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Question 2 -- Part A

• How much money needs to be borrowed?

P L F 40,000 100 40,918.37
(1-s) (1-.02)
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Question 2 -- Part B

• What is the dollar amount of the stock
  requirement?

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S .02(40,918) 818
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Question 2 -- Part C

• What is the monthly loan payment?

0.09/12 .0075 or 7.5 1230 360
Loan Payment (A) 40,918.37AUSPV0.75,360 A-329
.24
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Question 2 -- Part D

• 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.

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Federal Land Bank
Book Value BV 329.24 USPV.75,300 39,232
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Calculate Actuarial Rate (Yield)
...
0
60
1
2
...
r ?
-329.24
-329.24
-329.24
40,000
818
-39,232
40,000 329.24 USPVr,60 (39,232 - 818)
(1r)-60 40,000 329.24 USPVr,60 38,414
(1r)-60
i
N
PV
FV
PMT
?
-38,414
60
40,000
-329.24
i 0.77
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Calculate APR
APR 0.0077 12 0.0925 or 9.25
Calculate Effective Rate
ie 1(0.0925/12)12 -1 0.0965 or 9.65