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Andrea Perez
on Dec 20, 2024

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Hatter Enterprises has just borrowed money at 12% for 3 years. The pure rate of interest is 2%. Hatter's default risk premium is 3%, its liquidity risk premium is 3%, and its maturity risk premium is 1%. Inflation is expected to be 3% in the first year of the loan and 4% in the second year. What does the lender expect the inflation rate to be in the loan's third year?

A) 2%
B) 4%
C) 6%
D) 8%

Pure Rate

The theoretical rate of return of an investment with no risk of financial loss, often considered as the base rate for determining risk-adjusted returns.

Inflation

The speed at which the average cost of goods and services increases, leading to a decrease in buying power.

Default Risk Premium

The extra fee a borrower is required to cover to reward the lender for taking on the default risk.

  • Determine the influence of inflation on interest rates and grasp the integration of inflation adjustments in the computation of interest rates.
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Kehinde AdeosunDec 21, 2024
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