Recovery rate
A recovery rate measures the amount recovered after default relative to the relevant exposure, though calculation conventions can include discounting, costs and timing. Loss given default is often modelled as one minus the recovery rate when both use a consistent basis. Security, ranking, economic conditions and insolvency procedures affect recovery, and an estimate is not a guaranteed outcome. It is distinct from the probability that default occurs in the first place.
Worked example
If $300,000 is recovered from a $500,000 exposure and the simplified question ignores costs and timing, the recovery rate is 60% and loss given default is 40%. A 60% recovery rate does not imply a 60% probability of default.
Common mistake
Confusing the rate of recovery conditional on default with the probability of default, or ignoring time and costs when the model requires them.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |