PD
Probability of Default
Short definition
Probability of default is the chance of hitting the contract’s default definition over a stated horizon. Ratings and CDS are market/agency proxies; the cash model produces another PD.
Detailed explanation
A PD without a horizon is meaningless (one year versus tenor). Point-in-time PD moves with the cycle; through-the-cycle is flatter.
The firm approximates its own PD with DSCR, liquidity and maturity-wall stress. The bank model moves with collateral and sector.
Why it matters for the CFO
Spread and collateral are priced off expected loss. A PD rise cuts the line before default.
How it is calculated
EL ≈ EAD × PD × LGD (LGD = 1 − tahsilat oranı)
EAD is exposure, PD probability, LGD the complement of recovery. The three are separate assumptions.
Variables in the formula
- PD: probability of default over a stated horizon
- LGD: loss given default
How to read it
PD × LGD is expected loss. Low PD with high LGD (unsecured) is still expensive.
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Definitions are educational. They are not investment, credit or tax advice.