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Farmers' Choice of Fixed and Adjustable Interest Rate Loans
Author(s) -
Leatham David J.,
Baker Timothy G.
Publication year - 1988
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1241921
Subject(s) - fixed interest rate loan , hedge , debt , floating interest rate , interest rate , economics , loan , point (geometry) , econometrics , fixed point , monetary economics , mathematics , finance , mathematical analysis , ecology , geometry , biology
A discrete stochastic programming model of a midwestern crop‐hog farm was used to investigate farmers' fixed‐rate/adjustable‐rate loan decision. Results show it is optimal for farmers to pay up to 1.5 percentage points above adjustable interest rates to use some fixed‐rate debt. Below a one‐point premium all fixed‐rate debt is chosen. Above 1.5 points all adjustable rate debt is chosen except for more risk‐averse farmers, who choose all adjustable rate debt at 2.25 points or more. The feasibility of using financial options to hedge interest rates was investigated and found to be prohibitively expensive.