Probability of Default (PD)

The likelihood that a borrower fails to repay within a given period, usually a year.

Example

A 6% annual PD means about 6 of 100 similar loans are expected to default in a year.

Important

Default rates are not stable. They tend to rise sharply and together in recessions.

Related terms

• Loss Given Default (LGD) — The share of a loan's value that is lost when a borrower defaults, after recoveries.
• Expected Loss — The average loss a lender anticipates on a loan portfolio, calculated as probability of default times loss given default times exposure.
• Default — The failure of an issuer to meet a contracted obligation - a missed coupon, a missed principal repayment, or the breach of a term that permits creditors to demand repayment.

Lessons that explain it

• Interest minus expected losses minus fees — A lending return is the interest collected, less the share of principal lost to defaults after recoveries, less fees. Expected loss is the number the headline rate leaves out. (12 min)

All 578 terms in the Investing glossary