The porter, Oswald, returns with the information that the man at the door is a Jew named Isaac; he asks whether he ought to admit a Jew into the house. Brian de Bois-Guilbert and Prior Aymer are disgusted at the thought, but Cedric gruffly asserts that his hospitality is not to be limited by their dislikes. He suggests that the Jew could perhaps be entertained with the Templar's Saracen slaves, but de Bois-Guilbert rejects the idea. Cedric declares that Isaac shall be seated with Wamba, the jester.
The men discuss the Crusades, and the Templar declares that the English troops are second only to the Saracens. The palmer, who has largely been silent during the meal, interrupts, asserting that the English warriors are the most valiant of all. He lists the bravest English soldiers, beginning with King Richard. He says that the sixth-best soldier is a young Saxon named Ivanhoe. Brian de Bois-Guilbert jeers, saying that he could defeat Ivanhoe unarmed. The palmer says that if Ivanhoe ever returns to England, he will see to it that the Templar has an opportunity to test his assertion.
De Bois-Guilbert and Prior Aymer are traveling to the great jousting tournament at Ashby-de-la-Zouche. In response to the Templar's harsh inquiries ("Unbelieving dog," he begins), Isaac acknowledges that he, too, is traveling to the tournament, hoping that some of his brethren there can help him with his debts. After the men retire, the palmer overhears de Bois-Guilbert's Saracen slaves conversing; he speaks their language and discovers that the Templar intends to rob the Jew of his possessions. The palmer helps Isaac evade de Bois-Guilbert's manipulations; in return for this aid, Isaac lends the palmer a suit of armor and a horse so that he, too, may participate in the tournament.
As the day of the tournament dawns, Prince John is in attendance--the wretched Prince John who has, in his brother's absence, been party to the oppression of his people and who has done everything in his power to ensure that King Richard will remain in his Austrian prison and never return to England. But despite the miserable condition of the English, the tournament is still a festive and colorful occasion. Isaac attends with his beautiful daughter Rebecca; when he attempts to sit in an area reserved for prominent individuals--certain that John, who is in the process of seeking a large loan from the Jews, will not object--an argument breaks out. The Saxons, particularly Cedric and Athelstane, insist that an unbeliever should not be allowed the seats, while the Normans taunt them. The situation nearly boils over when John tells the Saxons that they are free to stop Isaac themselves. Cedric nearly attacks the Jew, but Wamba intervenes by chasing Isaac with a side of bacon. John takes a purse of gold from Isaac and forces him to sit with the common people, to the delight of the tournament crowd.
On the first day of the combat, the palmer, fighting as the Disinherited Knight, defeats all who oppose him, including de Bois-Guilbert. After his sequence of triumphs, the Disinherited Knight is allowed to choose the Queen of Love and Beauty for the following day of the tournament.
The introduction of Isaac and Rebecca introduces a third cultural element to the conflict between the Saxons and the Normans. In the religiously charged atmosphere of twelfth-century England, European Jews are in a terrible position; they are reviled by the Christians, abused and insulted by everyone around them, simultaneously blamed for their practice of "usury" (lending money and collecting interest) and coveted for their vast wealth. The nobility of Europe views the class of money-lending Jews essentially as an easy target, as is demonstrated at the tournament when John humiliates Isaac and then steals his purse of gold, and by de Bois-Guilbert's attempt to rob him. Isaac is often called a "dog" by those around him. Isaac is in debt because of a tax imposed upon all Jews by an English authority known as the Exchequer of the Jews. This tax is historically accurate: It was imposed on Jews in the twelfth century, ostensibly as a means of reprisal for their practice of usury.