CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Which equation is correct?

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%.
You need to log in first to add your comment.