[Verse 1] When you lend your money out, there's a chance you won't get paid That's the risk that lenders face in every deal they've made Credit risk is lurking there, in bonds and loans alike Understanding how it works will keep your portfolio right [Chorus] P-D times L-G-D equals E-L, that's the key Probability of Default times Loss Given Default, can't you see Expected Loss is what you'll face when borrowers can't repay Recovery Rate saves the day, it's what comes back your way [Verse 2] Default probability tells you the chance they'll fail to pay Measured as a percentage over one year's time today If a company looks shaky with their debt piled up so high The default probability will be reaching for the sky [Chorus] P-D times L-G-D equals E-L, that's the key Probability of Default times Loss Given Default, can't you see Expected Loss is what you'll face when borrowers can't repay Recovery Rate saves the day, it's what comes back your way [Verse 3] Loss Given Default shows you how much you'll lose if they default Usually a percentage of the total loan amount Senior debt gets paid first when companies go down Subordinated debt holders might not get a single pound [Bridge] Recovery Rate is one minus Loss Given Default If you lose sixty percent, forty comes back to you Add these pieces all together and you'll see the bigger view Credit risk in numbers clear, that's what analysts do [Chorus] P-D times L-G-D equals E-L, that's the key Probability of Default times Loss Given Default, can't you see Expected Loss is what you'll face when borrowers can't repay Recovery Rate saves the day, it's what comes back your way [Outro] From corporate bonds to mortgage loans, credit risk is everywhere Calculate Expected Loss and you'll be ready to prepare P-D, L-G-D, E-L, and Recovery Rate These four pillars of credit risk will make your knowledge great
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