Suppose that one year ago, Brian, a wheat farmer, obtained a loan for 1,000 bush

Question

Suppose that one year ago, Brian, a wheat farmer, obtained a loan for 1,000 bushels of wheat at a rate of $$3.50 per bushel from the government. The simple annual interest rate at which Brian is required to repay the loan is 2.5% of the total amount of the loan. If Brian decides to reclaim the contracted 1,000 bushels of wheat, the total amount that he must pay the government is. What will Brian do if the market price of wheat is $3.00 per bushel? He will keep the loan and forfeit the 1,000 bushels of wheat. He will repay the loan in exchange for the 1,000 bushels of wheat and then sell the wheat at the market price.

Explanation / Answer

Amount of laon taken by Brain = 1000 X $ 3.50 = $ 3500

Interest on the loan amount = 2.5% of $ 3500 = $ 87.5

If Brain reclaim the contract then the total amount the he must pay to the government is $ 3587.5 i.e. ($ 3500 + $ 87.5)

He will keep the loan and forfeit the 1,000 bushels of wheat as he earns loss due to fall in the market price of bushel.

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