Present value of expected loss question

Any help would be greatly appreciated:

Schweser book 4, page 165 (Credit Analysis Models)

The blue box demonstrates how to calculate the present value of expected loss however I can’t figure out how it is calculating the “PV(risky)”

For example (continuously compounded rates):

time(yrs) = 3; risk-free rate = .31%; Credit Spread = .1%; Total Yield = .41%; Cash Flow = 1030

The PV(risk-free) = $1020.47 which makes sense, calculated as 1030*e^-(.0031)(3)

The PV(risky), according to the example is $1007.99 which is not equal to 1030*e^-(.0041)(3) which I would think it would be. To get $1007.99 you need a yield of somthing like .729%, I don’t know where they are getting this value.


This calculation won’t be on the exam kid

That’s a bold statement considering the LOS says “Calculate and interpret the present value of the expected loss on a bond over a given time horizon”

Either way, it still doesn’t make sense. Things are easier to remember when they make sense.

Just know Pv expected loss is Pv risk free - Pv risky

no formulas needed

to actually answer your question:

Page: 165 - SchweserNotes Book 4, Pg.165, “PV(Risky)” column The correct values in the “PV(Risky)” column should be as follows: 0.5: 29.98, 1.00: 29.93, 1.50: 29.87, 2.00: 29.81, 2.50: 29.73, 3.00: 1017.41, Total: 1,166.73 (SchweserNotes Book 4, page 165, “Present value of expected loss” example) ( Posted: 2013-09-15)

Thank you very much, Galli.

Was that in the errata?

Sure is.

Thanks for the save Galli. I wasted an hour trying to figure this one out.

You and I both my friend