Recovery rate
Definition · Level 10 · Derivatives pricing
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Share of face value creditors get back after default; 40% is the standard pricing assumption for senior unsecured corporate debt, though realized values vary widely.
Example
Default with 40% recovery → protection seller pays 60% of notional.
Rules and market figures change: check the current ones before relying on this.
Where Tradecraft teaches it
Level 10 · Derivatives pricing, in the lesson “Credit derivatives & convertible bonds”: CDS mechanics and implied default odds, total return swaps, and the convertible as bond floor + call.
Related terms
- Bond floorValue of a convertible as a plain bond, ignoring the equity option; its downside support, which drops if the issuer’s credit worsens.
- Conversion premiumHow much more a convertible costs than the shares it converts into, as a % of that conversion value.
- Convertible arbitrageLong the convertible, short delta-worth of the shares: buying the embedded option’s cheap vol and earning carry.
- Convertible bondCorporate bond the holder can exchange for a fixed number of the issuer’s shares: a bond floor plus a call on the stock.
- Credit default swapInsurance on a borrower: the buyer pays a running spread in bp a year; on a credit event the seller pays notional × (1 − recovery).
- Hazard rateAnnual risk-neutral default intensity implied by credit spreads: ≈ spread ÷ (1 − recovery).