Probability of default
An estimate that an issuer will fail to meet its obligations within a stated period.
Formula
EL = PD \cdot LGD \cdot EADExpected loss is the product of probability of default, the share not recovered in default and the exposure at default. The figure applies to a group of similar borrowers, not to one name.
How to read the number
The number means something only together with a horizon: probability over one year and over five are different quantities for the same issuer.
When the metric lies
The estimate is derived from the history of comparable borrowers. For an issuer without peers — young, from a new segment, alone in its niche — that history simply does not exist.
Also known as: pd, default probability