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Value a risky corporate bond, assuming that the risk-free interest rate is 4 ercent period where a period is defined as six months. The corporate bond has a face value of $100 payable two periods from now and pays a5_percent coupon per period; that is, interest payments of $5 at the end of both the first period and the second period. The corporate bond is a derivative of the assets of the issuing firm. Assume that the assets generate sufficient cash to pay off the promised coupon one period from now. In particular, the corporation has set aside a reserve fund of $5/1.04 per bond to pay off the promised coupon of the bond one period from now. Two periods from now, there are three possible states. In one of those states, the assets of the firm are not worth much and the firm defaults, unable to generate a sufficient amount of cash. Only $50 of the $105 promised payment is made on the bond in this state. The exhibit below describes the value of the firm's assets per bond (less the amount in the reserve fund maintained for the intermediate 20upon) and the cash payoffs of the bond. The nonreserved assets of the firm are currently worth $100 per bond. At the U and D nodes, the reserve fund has been depleted and the remaining assets of the firm per bond are worth $120 and $90, respectively, while they are worth $300, $110, and $50, respectively, in the UU, UD, and DD states two periods from now. for the Value of the Firm's Assets Per Bond e the Node) Cash Payoffs of a Risky Bond w the Node) in a Two-Period Binomial Tree ar75wer 14 -trig 5100 $120 $5 $90 $5 $300 $105 $110 $105 $50 $50 In many instances, whether a cash flow occurs early or not is a decision of the issuer or holder of the derivative. One example of this is a callable bond, which is a bond that the issuing firm can buy back at a prespecified call price. Valuing a callable bond is complicated because the early call date is not known in advanceit depends on the future path followed by the underlying security. In these cases, it is necessary to compare the value of the security assuming it is held a while longerwith the value obtained from cash by calling the bond or prematurely exercising the call option. To solve these problems, you must work backward in the binomial tree to make the appropriate comparisons and find the nodes in the tree where intermediate cash flows occur. Suppose that in the absence of a call, a callable corporate bond with a call price of $ 100 plus accrued interest has cash flows identical to those Of