Loss Given Default (LGD)

Loss Given Default (LGD) is a financial term used to describe the expected loss on a loan or investment if the borrower defaults. It is calculated as the product of the probability of default (PD) and the loss severity (LS).

The PD is the estimated probability that a borrower will default on their loan. This is typically based on a borrower's credit score, debt-to-income ratio, and other factors. The LS is the estimated amount of money that will be lost if a borrower defaults. This is typically based on the value of the collateral that secures the loan.

LGD is an important factor in determining the risk of a loan or investment. The higher the LGD, the riskier the loan or investment. This is because there is a greater chance of losing money if the borrower defaults.

LGD is also used to calculate the expected return on a loan or investment. The expected return is the difference between the interest income earned on the loan and the expected loss if the borrower defaults.

LGD is a complex concept, but it is an important one for understanding the risk of loans and investments. By understanding LGD, investors can make more informed decisions about where to invest their money.

Here are some additional details about LGD:

* LGD is typically expressed as a percentage. For example, an LGD of 10% means that the lender expects to lose 10% of the loan amount if the borrower defaults.
* LGD can vary depending on the type of loan or investment. For example, LGD is typically higher for loans to borrowers with poor credit scores.
* LGD can also vary over time. For example, LGD is typically higher during economic downturns when the risk of default is higher.

LGD is an important factor to consider when making investment decisions. By understanding LGD, investors can make more informed decisions about where to invest their money.