What is probability of default?

The probability of default (PD) is the probability of a borrower or debtor defaulting on loan repayments. Within financial markets, an asset’s probability of default is the probability that the asset yields no return to its holder over its lifetime and the asset price goes to zero.

What is probability of default in credit risk management?

The Probability of Default is a key risk parameter used in the context of Credit Risk management. It is a forward-looking Expectation Measure, which assigns a numerical value between zero and one to the likelihood of an appropriately defined Credit Event (such as default, bankruptcy), within a specified time horizon.

What is 80% probability of no default?

In fact, this calculation takes TWO outcomes in consideration: No loss with 80% probability. 80% (=probability of NO default = 100% – PD) x 0% (zero loss) x 1 000 (EAD) = 140. I am just adding it here because you might have some loss even in “no default” situation due to late payments (time value of money!).

What does P robability of default mean?

P robability of default (PD) quantifies the likelihood of a borrower that he will not be able to meet its contractual obligations and will default. Default does not necessarily lead to immediate losses, but may increase the likelihood of bankruptcy and, hence, subsequent losses. Default is uncertain.