PV of expected loss = PV of risk free bond - risky bond but in following question it is PV of risky bond - PV of risk free bond

CFA Level II
#1

Finally, Chatham asks Town if he can provide a quantitative measure for the present value of a bond’s cash flow considering credit risk. Town indicates that he can demonstrate the calculation for a corporate bond that has promised to make a single payment of $1,050 in six years. A duration equivalent Treasury yields 1.5%, and the corporate bond offers a spread over Treasuries of 150 bps.

Q. The present value of the expected loss due to credit risk for the corporate bond in Town’s demonstration is closest to?

  1. $80.85.
  2. $170.62.
  3. $89.77.

The answer is -89.77.

#2

The PV of expected loss is simply the price difference between a risky bond and a risk-free bond. I don’t know why I get 80.91 as answer (which would be A), but supposing the book is right, I tell you that the sign of the PV of expected loss is meaningless, so don’t bother much on that detail.

Cheers