Exposure At Default - EAD

AAA

DEFINITION of 'Exposure At Default - EAD'

A total value that a bank is exposed to at the time of default. Each underlying exposure that a bank has is given an EAD value and is identified within the bank's internal system. Using the internal ratings board (IRB) approach, financial institutions will often use their own risk management default models to calculate their respective EAD systems.

INVESTOPEDIA EXPLAINS 'Exposure At Default - EAD'

Exposure at default - along with loss given default (LGD) and probability of default (PD) - is used to calculate the credit risk capital of financial institutions. The expected loss that will arise at default is often measured over one year. The calculation of EAD is done by multiplying each credit obligation by an appropriate percentage. Each percentage used coincides with the specifics of each respective credit obligation.

RELATED TERMS
  1. Capital

    1) Financial assets or the financial value of assets, such as ...
  2. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  3. Default

    1. The failure to promptly pay interest or principal when due. ...
  4. Default Risk

    The event in which companies or individuals will be unable to ...
  5. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  6. Cross Default

    A provisions in a bond indenture or loan agreement that puts ...
RELATED FAQS
  1. What are some alternatives a company can attempt prior to resorting to liquidation?

    Some alternatives a company's owners can attempt prior to resorting to liquidation are selling the company, raising money ... Read Full Answer >>
  2. Under what circumstances might a company decide to liquidate?

    There are many reasons a company may decide to liquidate. A smaller company may decide to liquidate if one of the main owners ... Read Full Answer >>
  3. What happens to the shares of a company that has been liquidated?

    The fate of a liquidating company’s shares depends on the type of liquidation the company is undergoing. The most common ... Read Full Answer >>
  4. What is the difference between compulsory and voluntary liquidation?

    Liquidation is the process where a firm's assets and liabilities are terminated, realized and subsequently distributed. In ... Read Full Answer >>
  5. What can cause a merger or acquisition deal to fail?

    When two large companies announce plans to merge, or when the larger of the two acquires the smaller entity, the surviving ... Read Full Answer >>
  6. What happens when a corporation declares bankruptcy?

    When a corporation faces severe financial challenges that cause its inability to repay debt obligations, filing for protection ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  2. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  4. Personal Finance

    7 Bankrupt Companies That Came Back

    Bankruptcy is often the end of a company – until it isn't.
  5. Economics

    Understanding Subordinated Debt

    A loan or security that ranks below other loans or securities with regard to claims on assets or earnings.
  6. Stock Analysis

    Will American Airlines Fall Back To Earth In 2015?

    The airline industry enjoys blockbuster profits, and American Airlines Group has been a key beneficiary of the favorable trends that have lifted stocks.
  7. Investing

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  8. Stock Analysis

    What’s The Best Airline Stock In the Industry?

    With many airlines forced to seek bankruptcy protection, Southwest Airlines stands out as having consistently remained profitable throughout its history.
  9. Investing

    What's a Sunk Cost?

    A sunk cost was incurred in the past, is independent of future events and cannot be recouped. Economists teach that sunk costs should not be considered when making a financial decision. Rather, ...
  10. Investing

    What's a Divestiture?

    Divestiture is when a company, government or other organization sells, shuts down or otherwise eliminates a division or operating unit. Divestitures happen for many reasons. Management may decide ...

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center