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.