What annual interest rate should the bank set

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Problem - Grose Paterson Bank Ltd is intending to lend money to a client. The loan is to be repaid in a lump sum after 7 years. The bank's required real rate of return is 3 percent per annum. The bank expects the inflation rate in the coming year to be 8 percent per annum, falling to 5 percent per annum the following year and 4 percent per annum thereafter. What annual interest rate should the bank set?

Reference no: EM132975736

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