Marshall Manufacturing Has Just Borrowed Money at 13% for 2

Marshall Manufacturing has just borrowed money at 13% for 2 years. The pure rate of interest is 2%. Marshall's default risk premium is 4%, its liquidity risk premium is 2%, and its maturity risk premium is 0.5%. Inflation is expected to be 3% during the first year of the loan's life. What does the lender expect the inflation rate to be in the loan's second year?

A) 3%
B) 4%
C) 5%
D) 6%