# CDS - Recovery Rate/Payout Rate

Hello, I am confused by an example given in Book 39 (CDS - the last Fixed Income Book). They say if a CDS defaults, the buyer will receive 1-recovery rate * notional amt. Infact, they give 1 or 2 examples after this is explained. But in Section 3.1, they give another example:

consider a simple example of a two-year, 5%, \$1,000 loan, with one interest payment of \$50 due in one year and a final interest and principal payment of \$1,050 due in two years… We will assume a 40% recovery rate, which is a common assumption for senior unsecured debt. Thus, if default occurs on the \$50 payment, the bondholder will receive \$20 (\$50 × 40%), and if default occurs on the final \$1,050 payment, the bondholder receives \$420 (\$1,050 × 40%)

Shouldn’t it be 1 - 40% * \$50 = \$30 and 1 - 40% * \$1050 = \$630

Confused.

Intuitively, recovery rate is the percentage at which you will retain your money in the event that a default occurred. Therefore, the example makes sense to me. Your definition, however, is what confuses me. I would assume that 1-recovery rate * notional amount is loss given default. I am unsure as to where you obtain that definition, either; chapter 39 is all about forward contracts.