Recovery rate

The proportion of a defaulted claim recovered through sale of collateral or restructuring. It depends on seniority and security.

Where you will meet it

Recovery rate comes up in 31 learning outcome notes across the FRM syllabus. A few of them:

• Corporate Bonds
  FRM Part I · Financial markets and products

  “The recovery rate measures how much of the claim is recovered afterwards.”

• Credit Risk Transfer Mechanisms
  FRM Part I · Foundations of risk management

  “The payment is Payout = notional × (1 − recovery rate).”

• External and Internal Credit Ratings
  FRM Part I · Valuation and risk models

  “A common market approximation is λ = spread ÷ (1 − recovery rate).”

• Credit Risk Management
  FRM Part II · Credit risk measurement and management

  “LGD is the fraction of exposure lost after recoveries, which is one minus the recovery rate.”

See also

Collateral · Seniority

All terms beginning with R · FRM glossary

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