Assume that you are a banker making loans in your home town. A client wants to get a 4 year fixed-rate loan. (In other words, the interest rate will be the same every year, for all 4 years) Assume the following:

1) You want a 4% return on your money for investments with no risk. In other words, you want 4% just for your sacrifice of not having your money. You also want to be compensated for any risk that you take.

2) The projected inflation rate will be 3% each year for the next 4 years.

3) The projected default risk is very low. So, your Default Risk Premium is .5% each year.

4) Maturity Risk Premium is .75% for every additional year, starting from time period zero. In other words, the MRP is .75% for the first year, 1.5% for the second year, 2.25% for the third year, and 3% for the fourth year.

5) You will not be able to sell the loan to another bank, therefore you have a very high Liquidity Premium of 6% each year.

What is the annual fixed rate that you will charge on the loan? Please show your work. You must show work to get credit.