- CFA Exams
- CFA Level I Exam
- Topic 7. Fixed Income
- Learning Module 16. Credit Analysis for Corporate Issuers
- Subject 3. Seniority Rankings, Recovery Rates, and Credit Ratings
CFA Practice Question
Which equation is correct?
B. Loss given default = Recovery rate - 1.
C. Recovery rate = Loss given default - 1.
A. Loss given default + Recovery rate = 1.
B. Loss given default = Recovery rate - 1.
C. Recovery rate = Loss given default - 1.
Correct Answer: A
Note this is slightly different from the textbook example. The book shows an example of 40% recovery rate and 62.4 LGD. However, 62.4/104 = 60%.
User Contributed Comments 2
| User | Comment |
|---|---|
| ashish100 | Tricky tricky.... |
| doubleling | According to investopedia: The recovery rate enables an estimate to be made of the loss that would arise in the event of default, which is calculated as (1 - Recovery Rate). Thus, if the recovery rate is 60%, the loss given default or LGD is 40%. |