Question $3.$

$($Arbitrage and the Law of One Price$)$ A corporate bond of the Diageo Group $($DGE$)$ is selling for $$90\mathrm{.}55$ today and will pay the principal of $$100$ one year from today with no interest. The corporate bond of TD Bank $($TD$)$ sells for $$80\mathrm{.}20$ now and will pay the principal of $$100$ in exactly two years, with no interest. Suppose a portfolio is created with a combination of DGE and TD corporate bonds and will pay $$200$ in one year and $$400$ in two years.

What is the current fair market price of the portfolio? $(0\mathrm{.}15$ points$)($Hint: Think about this: what combination of the two bonds could generate the same cash flows as the portfolio.$)$

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Is there an arbitrage opportunity if the portfolio sells for $$550?(0\mathrm{.}2$ points$)$

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