## Expected Loss Solution

STEP 0: Pre-Calculation Summary
Formula Used
Expected Loss = Default Probability*Loss Severity given Default
EL = DP*LSD
This formula uses 3 Variables
Variables Used
Expected Loss - Expected Loss represents the anticipated financial loss resulting from a specific risk, calculated as the product of the loss severity, probability of default, and exposure at default.
Default Probability - Default Probability refers to the likelihood that a borrower or debtor will fail to meet their financial obligations, such as making loan repayments or servicing debt.
Loss Severity given Default - Loss Severity given Default refers to the proportion of financial loss incurred if a borrower or debtor defaults on their obligations.
STEP 1: Convert Input(s) to Base Unit
Default Probability: 0.05 --> No Conversion Required
Loss Severity given Default: 0.8 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
EL = DP*LSD --> 0.05*0.8
Evaluating ... ...
EL = 0.04
STEP 3: Convert Result to Output's Unit
0.04 --> No Conversion Required
0.04 <-- Expected Loss
(Calculation completed in 00.004 seconds)
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## Credits

Created by Keerthika Bathula
Indian Institute of Technology, Indian School of mines, Dhanbad (IIT ISM Dhanbad), Dhanbad
Keerthika Bathula has created this Calculator and 50+ more calculators!
Verified by Aashna
IGNOU (IGNOU), India
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## < 14 Fixed Income Securities Calculators

Accrued Interest
Accrued Interest = (Face Value*Total Annual Coupon Rate*Days since Last Payment Date)/(Number of Coupon Payments per Year*Accrual Period)
Conversion Premium = Conversion Value-Market Price of Convertible Bond
Conversion Ratio
Conversion Ratio = Par Value at Maturity/Conversion Price of Equity
Convexity Adjustment = Bond's Convexity*(Change of Yield^2)*100
Callable Bond Price
Callable Bond Price = Non Callable Bond Price-Call Option Price
Nominal Yield
Nominal Yield = (Total Annual Interest Payments/Face Value)*100
Expected Loss
Expected Loss = Default Probability*Loss Severity given Default
Putable Bond Price
Putable Bond Price = Non Putable Bond Price+Put Option Price
Conversion Value
Conversion Value = Market Price per Share*Conversion Ratio
Floating Interest Rate
Floating Interest Rate = Reference Rate+Fixed Spread
Dirty Price
Dirty Price = Clean Price+Accrued Interest
Clean Price
Clean Price = Dirty Price-Accrued Interest
Semi Annual Bond Equivalent Yield
Semi Annual Bond Equivalent Yield = Yield per Semi Annual Period*2
Loss Severity
Loss severity = 1-Recovery Rate

## Expected Loss Formula

Expected Loss = Default Probability*Loss Severity given Default
EL = DP*LSD

## What is Expected Loss ?

Expected loss is a pivotal metric in risk management, representing the average financial impact anticipated from potential losses within a specific portfolio or exposure. It combines the probability of an adverse event occurring, such as a borrower defaulting, with the severity of the resulting loss and the exposure at the time of the event. This calculation enables businesses, financial institutions, and insurers to gauge the overall risk within their operations, allocate appropriate reserves, set pricing strategies, and make informed decisions regarding risk acceptance or mitigation. By quantifying the expected loss, organizations can better prepare for uncertainties, safeguard financial stability, and optimize risk-return trade-offs.

## How to Calculate Expected Loss?

Expected Loss calculator uses Expected Loss = Default Probability*Loss Severity given Default to calculate the Expected Loss, The Expected Loss is the anticipated financial loss resulting from a specific risk event, calculated as the product of loss severity, probability of default, and exposure at default. Expected Loss is denoted by EL symbol.

How to calculate Expected Loss using this online calculator? To use this online calculator for Expected Loss, enter Default Probability (DP) & Loss Severity given Default (LSD) and hit the calculate button. Here is how the Expected Loss calculation can be explained with given input values -> 0.04 = 0.05*0.8.

### FAQ

What is Expected Loss?
The Expected Loss is the anticipated financial loss resulting from a specific risk event, calculated as the product of loss severity, probability of default, and exposure at default and is represented as EL = DP*LSD or Expected Loss = Default Probability*Loss Severity given Default. Default Probability refers to the likelihood that a borrower or debtor will fail to meet their financial obligations, such as making loan repayments or servicing debt & Loss Severity given Default refers to the proportion of financial loss incurred if a borrower or debtor defaults on their obligations.
How to calculate Expected Loss?
The Expected Loss is the anticipated financial loss resulting from a specific risk event, calculated as the product of loss severity, probability of default, and exposure at default is calculated using Expected Loss = Default Probability*Loss Severity given Default. To calculate Expected Loss, you need Default Probability (DP) & Loss Severity given Default (LSD). With our tool, you need to enter the respective value for Default Probability & Loss Severity given Default and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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