Nu-Mode Fashions Inc. manufactures quality women's wear and needs to borrow money to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO has asked you to estimate the interest rate Nu-Mode should expect to pay on a one-year loan. She's told you to assume a 3.2% default risk premium, even though the loan is relatively short, and to assume the liquidity and maturity risk premiums are each %. Inflation is expected to be 4.2% over the next 12 months. Economists believe the pure interest rate is currently about 3%. Round your answer to one decimal place.

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Mountain Sports Inc. borrowed money for two years last week at 12%. The pure rate is 2%, and Mountain's financial condition warrants a default risk premium of 2.6% and a liquidity risk premium of 1.4%. The maturity risk premium for two-year loans is 1%. Inflation is expected to be 3% next year. What does the interest rate model imply the lender expects the inflation rate to be in the following year? Round your answer to one decimal place.

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Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams's financial condition warrants a default risk premium of 2.4% and a liquidity risk premium of 1.4%. There is little or no maturity risk in one-year loans. What inflation rate do lenders expect next year? Round your answer to one decimal place.

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Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 15%. The maturity risk premium is zero for one-year debt and 1% for two-year debt. The real risk-free rate is 3.4%. What are the expected rates of inflation for the next two years? (Hint: Set up a separate model for each term with the yearly inflation rates as unknowns.) Round your answer to one decimal place.

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