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Question: A company has hired you to analyse how much money can it borrow. The economy is bad, but bank has agreed to loan the company some money. The company asks you what interest rate it should pay for the loan. you told the company that its default risk premium is 3%, the liquidity premium is 0.5%, the maturity risk premium is 1.0%, the rate on a 10 year government bond is 3.5% and inflation is expected to be 4% next year. What should the company expect to pay for the loan?

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