Calculate the interest rate: Loren Co. plans to invest in a 3-year bond to buy machinery. The company has the following information available: K* is 2%, Lp, MRp and Drp add .5 percent each to the yields on notes like this for each year of the term. The first machine must be payed off in 3 years and the second in 2 years. Next year the inflation rate is 5% and then 6% and 7%.

Calcute interest rate for the first two years.