If a borrower defaults, the bank may not lose their entire exposure. This is because a bank will usually have taken action to mitigate the loss. To quantify the credit risk on any position, a bank needs to identify what it actually expects to lose if a default were to occur. This is referred to as a loss given default and is typically expressed as a percentage of the total exposure. For example, if the total exposure at default is 100,000, and the LGD, loss given default, is estimated to be 60%, the bank would lose 60,000 in the event of default, not the entire 100,000. Another way of expressing this would be to say that the 40,000, would be recovered and you could find that by taking one minus the LGD, so one minus 60%, to get the 40% recoverable. There are a number of ways in which the loss given default can be reduced, including guarantees. These are a promise by one party, the guarantor, to assume the debt obligation of a borrower if that borrower defaults. For example, a subsidiary borrows and the parent company could be guarantor. Collateral could also be used. This is sometimes called security. This is where the value of an asset is pledged to the bank. This can then be seized in the event of a default and can be used to recoup their losses. High quality collateral could include things like land and buildings because it would be easy for the bank to sell if it was seized. Hedging could also be used to mitigate the LGD. Hedging could use financial market instruments such as credit default swaps, or hedging could be more natural in that the bank could be just well diversified and this would mean not putting all of their efforts into one sector or one product. The probability of default is the chance of a company defaulting on its obligations, maybe through missing an interest or principle payment, breaching the covenants or ultimately going bankrupt. When a bank makes a loan, it's the bank's responsibility to assess the probability of default. Bond investors can benefit from looking at a company's credit rating. Credit rating is a measurement of the credit worthiness of a borrower. Credit assessment and evaluation for companies and governments is generally done by a credit ratings agency, such as Standard and Poor's, Moody's or Fitch. These ratings agencies are paid by the entity that's seeking a credit rating for itself or for one of its debt issues.