LGD (Loss Given Default)

Loss Given Default (LGD) = 1 − Recovery Rate. It measures what fraction of your investment you lose if the issuer defaults. For example, a senior unsecured bond with 40% recovery rate has LGD = 60%: you lose 60% of face value. LGD is the key credit parameter alongside PD: Expected Loss = PD × LGD. LGD varies by seniority: Senior secured ~35% (65% recovery), Senior unsecured ~60% (40% recovery), Subordinated ~75% (25% recovery). Higher seniority = lower LGD = lower credit risk. LGD can change dramatically in distress: Lehman Brothers had senior unsecured LGD ≈ 72% (vs. the typical 40% assumption). In addition to bond covenants, collateral quality and the jurisdiction's bankruptcy law determine LGD.