The expected loss for a given debt instrument is estimated as the product of default prob- ability and:
A) (1 + Recovery rate).
B) (1 − Recovery rate).
C) 1/(1 + Recovery rate).

Question

Quizplus · Accepted Answer

The expected loss is the product of default probability and the loss given default, which is (1 - recovery rate). This is because recovery rate represents the portion of the debt that is recovered in case of default, and the remaining portion that is lost is represented by (1 - recovery rate). Therefore, the correct choice is B.

The Expected Loss for a Given Debt Instrument Is Estimated