Recovery rate

The share of an exposure recovered after a default. It falls in the same conditions that cause defaults, which is what makes losses cluster.

Where you will meet it

Recovery rate appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Set out the elements that make up credit risk
  CFA Level I · Fixed Income

  “Expected loss is the product of the probability of default and the loss given default, which is one minus the recovery rate, applied to the amount exposed.”

• Explain expected exposure, probability of default, loss given default and the adjustment to value for credit (CVA)
  CFA Level II · Fixed Income

  “Loss given default is exposure × (1 − recovery rate).”

• Work out expected loss using default probability and loss given default
  CFA Level I · Fixed Income

  “Expected loss is the probability of default multiplied by the loss given default, where loss given default is one minus the recovery rate applied to the exposure.”

• Work out a bond's value and credit spread from assumed credit risk parameters
  CFA Level II · Fixed Income

  “A quick check is that the spread is close to the hazard rate × (1 − recovery rate).”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with R · Glossary