1.)Best Bows Inc. has just borrowed money at 13% for 2 years from Aurora Savings bank....

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1.)Best Bows Inc. has just borrowed money at 13% for 2 yearsfrom Aurora Savings bank. The pure rate of interest is 2%. BestBow's default risk premium is 3%, its liquidity risk premium is 2%,and its maturity risk premium is 0.5%. Inflation is expected to be3% during the first year of the loan's life. What does the bankexpect the inflation rate to be in the loan's second year?
2.)

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1.)Best Bows Inc. has just borrowed money at 13% for 2 yearsfrom Aurora Savings bank. The pure rate of interest is 2%. BestBow's default risk premium is 3%, its liquidity risk premium is 2%,and its maturity risk premium is 0.5%. Inflation is expected to be3% during the first year of the loan's life. What does the bankexpect the inflation rate to be in the loan's second year?2.)