1. What is Default Risk?

Default Risk represents the potential loss that a lender or investor faces when a borrower fails to meet their debt obligations. It is calculated as the product of Probability of Default and Loss Given Default, expressed as a percentage.

2. How Does the Calculator Work?

The calculator uses the default risk formula:

Where:

• Probability of Default — Likelihood that a borrower will default (percentage)
• Loss Given Default — Percentage of exposure lost in case of default

Explanation: The formula combines the likelihood of default with the potential loss magnitude to quantify overall credit risk exposure.

3. Importance of Default Risk Calculation

Details: Accurate default risk assessment is crucial for credit risk management, loan pricing, portfolio management, and regulatory compliance in financial institutions.

4. Using the Calculator

Tips: Enter Probability of Default and Loss Given Default as percentages (0-100%). Both values must be valid non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a typical Probability of Default range?
A: PD typically ranges from 0.01% for highly rated entities to 20%+ for high-risk borrowers, depending on credit rating and economic conditions.

Q2: How is Loss Given Default determined?
A: LGD is estimated based on collateral value, recovery rates, and historical data, typically ranging from 20% to 60% for secured loans.

Q3: What is considered high default risk?
A: Default risk above 5% is generally considered high, though this varies by industry and economic context.

Q4: How does this relate to Expected Loss?
A: Default Risk calculation provides the Expected Loss percentage, which can be multiplied by exposure amount to get monetary expected loss.

Q5: Are there limitations to this calculation?
A: This simple calculation assumes independence between PD and LGD, which may not always hold true in practice. More complex models incorporate correlation factors.