Problem 5-6

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.

Calculate the rate Nu-Mode should expect to pay on a two-year loan. Assume a 4.4% default risk premium and liquidity and maturity risk premiums of 3/4% due to the longer term. Inflation is expected to be 4.2% over the next 12 months and 5% in the loan's second year. Economists believe the pure interest rate is currently about 3%. Round your answer to two decimal places.

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