LGD Calculator - Loss Given Default
Calculate the amount of money at risk if an investment defaults
Calculate Loss Given Default (LGD)
Total amount of investment at risk
Percentage of investment expected to be recovered
Rate Relationship
Loss Given Default Results
Formula: LGD = Expected Exposure × Loss Severity
Calculation: $1,000,000 × 20.0% = $200,000
Alternative: LGD = Expected Exposure × (1 - Recovery Rate)
Risk Assessment: You risk losing 20.0% of your total investment if default occurs
Risk Assessment
Example: Company Alpha Investment
Investment Details
Company: Company Alpha
Expected Exposure: $1,000,000
Recovery Rate: 80%
Loss Severity: 20%
LGD Calculation
LGD Formula: $1,000,000 × 20%
Loss Given Default: $200,000
Expected Recovery: $800,000
This means if Company Alpha defaults, you could lose $200,000 but recover $800,000
LGD Risk Categories
Low Risk
Strong recovery expected
High-quality collateral
Moderate Risk
Reasonable recovery
Average asset quality
High Risk
Limited recovery
Poor asset quality
Very High Risk
Minimal recovery
Distressed assets
Key Insights
LGD measures worst-case loss amount, not probability of default
Recovery rate and loss severity always sum to 100%
Use with probability of default for complete risk assessment
Secured debt typically has lower LGD than unsecured debt
High LGD doesn't always mean high overall risk
Understanding Loss Given Default (LGD)
What is Loss Given Default?
Loss Given Default (LGD) represents the amount of money you risk losing if a company or investment defaults on its obligations. It's a crucial metric for assessing credit risk and understanding worst-case scenarios.
Why is LGD Important?
- •Quantifies potential financial impact of default
- •Helps in portfolio risk management
- •Assists in pricing credit instruments
- •Guides investment decision-making
Formula and Components
LGD = Expected Exposure × Loss Severity
LGD = Expected Exposure × (1 - Recovery Rate)
- Expected Exposure: Total investment amount at risk
- Recovery Rate: Expected percentage to be recovered
- Loss Severity: Expected percentage to be lost
- LGD: Absolute dollar amount at risk
Important: LGD shows impact severity but not probability of occurrence.
Factors Affecting LGD
- 📈Collateral Quality: Better collateral = lower LGD
- 📈Seniority: Senior debt typically has lower LGD
- 📉Industry Sector: Some sectors have lower recovery rates
- 📉Economic Conditions: Recessions reduce recovery prospects
LGD vs Other Risk Metrics
- 🔍LGD: Measures loss severity upon default
- 🔍PD (Probability of Default): Measures likelihood of default
- 🔍EAD (Exposure at Default): Amount exposed when default occurs
- 🔍Expected Loss: PD × LGD × EAD