The exhibit below describes the value of the

firm's assets per bond $($less the amount in the

reserve fund maintained for the intermediate

coupon$)$ 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.

Paths for the Value of the Firm's Assets Per Bond

$($Above the Node$)$ Cash Payoffs of a Risky Bond

$($Below the Node$)$ in a Two$-$Period Binomial Tree

Diagram