Determination of Default Probability by Loss Given Default

Determination of credit losses can be provided by banks through the use of an analysis of the actual loan defaults. The quantification of expected losses should be based on an analysis of multiple variables, cause the determination process might be problematic, but it is significant for institutions such as banks but also for others. Main components of the credit risk are the Probability of Default (PD) and the Loss Given Default (LGD). These are included in the credit spread, which is the difference in market prices between defaultable and default-free bonds. The article is dedicated to the theoretical aspects of Loss Given Default.