1 is the principal component and you are only calculating the returns on principal. Think it this way - you started with 1 and ended with 1.22. So, your returns is 1.22 - 1 = 0.22

The -1 is not a principal component factor. The question is trying to determine if the investor should invest or not. The investor has stated that he will invest if the spread ABOVE the 10 year treasury bond is at last .5% (50bps).

The total risk premium on this investment is 1.22. Now, test if it’s enough return. The spread of the 10 year treasury bond is 1% so you take 1.22% - 1% ( the given rate in this problem) = .22. .22 is less than the investor’s required .50 amount so the investor WILL NOT INVEST. Not enough required return.