A $100 Face Value One-Year Risk-Free Discount Bond Is Priced $\{ 99.74,94.74,89.74 \}$

Multiple Choice

A $100 face value one-year risk-free discount bond is priced at $95. The two-year discount bond is priced at $90. After one year, the two-year bond will take one of three possible prices with defined probabilities. Which of the following sets of prices is acceptable from a no-arbitrage standpoint?

A) $\{ 99.74,94.74,89.74 \}$ with equal probabilities.
B) $\{ 99.74,94.74,89.74 \}$ with probabilities $\{ 0.25,0.50,0.25 \}$ .
C) Both (a) and (b) .
D) The problem is not well-defined because there is no unique martingale probability measure for the two-year bond.