Credit Risk
Credit risk is the potential that a borrower or counterparty will fail to meet financial obligations when due, resulting in a loss to the lender or investor.
Example: In a bank loan portfolio, a lender estimates a borrower's PD at 3%, LGD at 60%, and EAD at $80,000; the resulting expected loss is 0.03 × 0.60 × 80,000 = $1,440.
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