PD provides a continuous spectrum of default risk and shows how much difference there is in credit quality between credits. Probability of default is obligor risk – not transaction risk – and is measured separately from the risk of loss or inadequate recovery of asset collateral value. Internal ratings and the ratings of external ratings agencies may be used to determine PD.
| One-Year US Commercial Transition Rates 2014 (%) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Rating at End of Year (%) | |||||||||
| Initial | AAA | AA | A | BBB | BB | B | CCC/C | D | NR |
| AAA | 87.03 | 9.03 | 0.54 | 0.05 | 0.08 | 0.03 | 0.05 | 0.00 | 3.19 |
| AA | 0.54 | 86.53 | 8.14 | 0.54 | 0.06 | 0.07 | 0.02 | 0.02 | 4.07 |
| A | 0.03 | 1.83 | 87.55 | 5.38 | 0.35 | 0.14 | 0.02 | 0.07 | 4.64 |
| BBB | 0.01 | 0.11 | 3.58 | 85.44 | 3.75 | 0.56 | 0.13 | 0.20 | 6.23 |
| BB | 0.01 | 0.03 | 0.14 | 5.16 | 76.62 | 6.96 | 0.66 | 0.76 | 9.64 |
| B | 0.00 | 0.03 | 0.10 | 0.21 | 5.40 | 74.12 | 4.37 | 3.88 | 11.89 |
| CCC/C | 0.00 | 0.00 | 0.14 | 0.22 | 0.65 | 13.26 | 43.85 | 26.38 | 15.49 |
| Source: Standard & Poor’s | |||||||||
Exposure at default (EAD) is the exposure of a creditor (bank, leasing company) at the moment the debtor goes into default equal to the unamortized balance of a financial exposure (lease, loan) at default. The unamortized balance (UAB) is the net investment in a loan or other financial asset less the amount of accumulated amortization recognized since its origination, which is the net book value (NBV) and current value of the receivable.