Recovery Rate

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.