Consider the three risk-free bonds described in the table below. The first two are zero-coupon bonds. They make a single (bullet) payment of principal and accrued interest at maturity, but make no cash payments prior to maturity. The third bond is a two-year bond that pays a ten percent coupon annually. All of the bonds have a face (par) value of $100.

	Bond Price	Year 1 Cash Flow	Year 2 cash flow
Bond A	89.50	100	-
Bond B	80	-	100
Bond C	95	10	110

A. Calculate the yield-to-maturity for each of the bonds shown in the table above.

B. Of the three bonds, which ones are relatively overpriced and which ones are relatively underpriced.

C. The bond prices shown in the table above are inconsistent with the law of one price. Describe a portfolio of bonds that would profit from this inconsistency by generating a positive cash flow today and zero cash flows in Year 1 and Year 2. Assume that you can buy or sell any of the bonds at the prices show.

D. Bond D pays $20 at the end of one year and $120 at the end of two years. Assuming that Bond A and Bond B are priced correctly, what Bond D price would satisfy the law of one price?