Suppose you want to invest $ 1,000 for two years. The current term structure of interest rates is: one-year bond: annual rate 6%; two-year bond: annual rate 7%.

(a) If you want to be certain of the amount that occurs after two years, what is the amount you receive at the end of year 2?

(b) Suppose you invest for one year and enter into a contract that guarantees the interest rate you seek for one more year (for year 2), what should that future rate be? What will happen to the amount received at the end if that rate is different from that?