Probability of Default

Probability of Default (PD) refers to the likelihood that a borrower, such as an individual or a company, will fail to meet their debt obligations, meaning they will be unable to make scheduled payments on a loan or bond. It is often expressed as a percentage and is used by lenders and investors to assess credit risk. A higher PD indicates a greater risk of default, influencing lending decisions, interest rates, and investment strategies. Essentially, it helps financial institutions gauge how risky it is to lend money or invest in someone’s ability to repay their debts.