1. The spot rate for year 1 is 7.5% and the forward rate for year one to two is 8%. The two-year discount factor is: (a) 0.845. (b) 0.861. (c) 0.852. (d) 0.888. (e) 0.874.
2. An investor feels that the future spot rate for year 2 will be 7%. Presently, he can invest for one year at 6% or two years at 7%. His liquidity premium for year two is (a) 0.51%. (b) 2.01%. (c) 1.0%. (d) 0%. (e) 0.01%.