Credit Risk Management Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Credit Risk Management Exam. Enhance your skills with flashcards, detailed explanations, and a comprehensive quiz format designed for effective learning. Achieve exam readiness!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What does loss given default (LGD) measure?

The percentage of exposure that is lost when a counterparty defaults
The total amount owed by a counterparty upon default
The variance in loan repayments
The recovery rate of past due loans

The correct answer is: The percentage of exposure that is lost when a counterparty defaults

Loss given default (LGD) specifically measures the percentage of exposure that is lost when a counterparty defaults on their obligations. It calculates the potential loss to a lender or creditor after accounting for any recoveries that can be made through the liquidation of collateral or other recovery processes. This metric is crucial for evaluating credit risk, as it helps lenders understand the potential financial impact of defaults in their loan portfolios. While other options touch on related concepts, they do not specifically define what LGD evaluates. The total amount owed by a counterparty upon default pertains more to the outstanding debt rather than the loss incurred, while variance in loan repayments refers to the consistency of payments, not the loss measurement. The recovery rate of past due loans relates to amounts recovered after a default, which is inversely related to LGD. Overall, the correct option accurately reflects the essence of LGD as a key risk management parameter.