Given:

One-Year Zero 8%

Two-Year Zero 10%

1y1y Forward 12.00%

Question1: Present value a $1,000 cash flow to be received at the end of year

Question 2: Show the present value of a $1,000 cash flow to be received at the end of year 2

Question3: Prove that the 1y1yr forward rate of interest is in fact 12.04%. First, discount the $1,000 cash flow to be received at the end of year 2 back one year, the end of year 1 using the 1y1y forward rate. Second, discount that figure back to time zero using the 1y spot rate. Does the PV equal your answer from question 2?