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A bank considers making a loan. The real rate of interest in the economy is 2.2%. The expected average annual rate of inflation over the
A bank considers making a loan. The real rate of interest in the economy is 2.2%. The expected average annual rate of inflation over the life of the loan is 3.4%. The loan has an interest rate risk premium of 2.5%, a liquidity risk premium of 1.2%, and a default risk premium of 4.5%. The bank attaches no other risk premia to this loan. According to the "Modern View" of interest rates, what rate will the bank charge for the loan? Write your answer out to three decimals - for example, write 6.2% as .062.
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