(Solution) - Mountain Sports Inc borrowed money for two years last week -(2025 Original AI-Free Solution)

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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 3% and a liquidity risk premium of 2%. 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?