Bonds & rates
Recovery rate
How much of a defaulted bond’s face value holders eventually get back.
How it works
Recovery depends on seniority and on whether the debt is secured against specific assets. Senior secured debt has historically recovered a substantial share; subordinated debt very little.
The expected loss from credit risk is the default probability multiplied by one minus the recovery rate — not the default probability alone.
Related terms
- DefaultA borrower failing to make a payment, or breaching a term of the debt agreement.
- Capital structureThe ranking of everyone who funded a company, deciding who gets paid first if it fails.
- Credit riskThe risk that a borrower fails to make the payments it promised.
- CovenantA condition in a loan agreement that the borrower must keep to.
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