What pure interest rate is implied by these assumptions

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The H Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. H estimates its default risk premium at about 1.5% and its maturity risk premium at about .5%. Because it's a relatively small and unknown firm, its liquidity risk premium is about 2% even on a relatively short debt like this. What pure interest rate is implied by these assumptions? Please show formula and answer.

Reference no: EM13909315

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