Recovery Rate
Percentage of par value recovered by bondholders if the issuer defaults.
Recovery rate is what you get back after a default, expressed as a percentage of face value. Industry standard assumptions (Moody's long-run averages): Senior secured: ~65%, Senior unsecured: ~40%, Subordinated: ~25%. The complement (1 − Recovery Rate) is Loss Given Default (LGD). Recovery rates drive credit spread decomposition: Spread ≈ PD × LGD. In practice, recovery varies enormously: Lehman Brothers recovered ~28%, while most corporate defaults recover 30–50%. The 40% standard assumption is used for CDS pricing and CFA exam problems.
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.
Modified Duration
Measures the percentage price change for a 1% yield change.
Convexity
Measures the curvature of the price-yield relationship — how duration itself changes.
Stress Test (Rate Shock)
Estimates impact of large yield moves using duration and convexity.