If a farmer borrows $1,000,000 with an interest-only loan at 12%, what is the monthly payment?

To determine the monthly payment for an interest-only loan, you need to calculate the monthly interest on the borrowed amount. In this case, the farmer has borrowed $1,000,000 at an interest rate of 12% per year.

First, convert the annual interest rate into a monthly rate. The monthly interest rate is calculated as 12% divided by 12 months, which equals 1% per month.

Next, compute the monthly interest payment by multiplying the principal amount ($1,000,000) by the monthly interest rate (1%). So, $1,000,000 multiplied by 0.01 equals $10,000.

The borrower pays only this interest amount each month, making the monthly payment $10,000. This approach clearly illustrates why the correct answer accurately reflects the reality of an interest-only loan payment structure.