Relationship between PVEL and EL

CFA Level II Fixed Income
#1

In Schweser’s book, the present value of expected loss=expected loss+risk premium-time value. Could someone help to just roughly explain this relationship please, like why to plus risk premium and to minus time value… Unable to understand the rationale behind it.

#2

PV of expected loss makes few adjustments:

  1. Risk premium —> reflects a higher risk vis-a-vis a risk-free bond. (+) sign because the riskier the bond the higher the loss

  2. Time value —> loss in the future is less of a concern than a loss now, cause at the very least the investor would have collected some coupons before the default. Hence the (-) sign would reduce the loss.

#3

Thanks a lot for this explanation. Really helped me.