LGD (Loss Given Default)
The fraction of exposure lost if the issuer defaults — equals 1 minus the recovery rate.
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.
Expected Loss (EL)
Probability of default multiplied by loss given default — the credit cost priced into spreads.
Recovery Rate
Percentage of par value recovered by bondholders if the issuer defaults.
Default Probability (PD)
Annualized probability of issuer default, implied from credit spread and assumed recovery rate.
DV01
Dollar change in value for a 1 basis point (0.01%) yield move.
CS01
Dollar change in value for a 1 basis point move in credit spread.
Macaulay Duration
The weighted average time (in years) to receive the bond's cash flows.