Default Risk Premium for a One-Period Debt Instrument, QM ba concerning, everyone, expected, question, example

ftwcfa

Hi everyone, I have a question concerning how the CFA book came to the calculations they did.
Reading 8, example 11, page 431.
In calculating the “third step”, finding the expected value of the bond per every 1$ invested.
Where does the ” [1-P(bond default)] ” part come from?
Thanks for the help!

karoliukas

What is the full formula?

redskins44

Calculate expected value of the bond (per $1 invested):
Bond value:  $0 if bond defaults,    $(1+R) if bond does not default
E(bond) = $0 x P(bond default) + $(1+R) x [1-P(bond default)]

Halawiz

Now I get it, thanks!

disiz64

Now I get it, thanks!