Loss Given Default Calculator





Formula

The formula to calculate the Loss Given Default (LGD) is:

\[ \text{LGD} = \text{Expected Exposure} \times \text{Loss Severity} \]

or equivalently:

\[ \text{LGD} = \text{Expected Exposure} \times (1 - \text{Recovery Rate}) \]

Description

Loss Given Default (LGD) is a measure of the potential loss to an investor if a borrower defaults on a loan. It is calculated by multiplying the expected exposure by the loss severity (or one minus the recovery rate).

Example Calculation

Let's assume the following:

Step 1: Calculate the loss severity:

\[ \text{Loss Severity} = 1 - \text{Recovery Rate} = 1 - 0.80 = 0.20 \]

Step 2: Calculate the Loss Given Default (LGD):

\[ \text{LGD} = \$1,000,000 \times 0.20 = \$200,000 \]

Therefore, the Loss Given Default is $200,000.