A farmer borrows $1,000,000 to purchase farmland. If he is making monthly payments on an interest-only loan with a 12% interest rate, what is the principal balance?

In the context of an interest-only loan, the principal balance remains unchanged during the period in which only interest payments are being made. In this scenario, the farmer borrowed $1,000,000, and since he is only making monthly payments on the interest, the principal amount of the loan—$1,000,000—will stay the same unless he makes additional payments toward the principal.

Interest-only loans function in such a way that the borrower pays off the interest accrued on the principal but does not reduce the principal itself during the term of the loan. Therefore, the amount owed as principal will always reflect the original borrowing amount unless there are provisions to pay down the actual loan during this interest payment period.

This understanding is crucial for farmers and agribusiness managers who utilize such loans, as it helps them manage cash flow and assess financial commitments over time.