Credit · Core
Probability of Default
PD is the probability a name defaults over a horizon — real-world for books, risk-neutral for CDS.
Definition
Real-world PD comes from ratings, scorecards, or Merton-style models. Risk-neutral PD is backed out of spreads given an LGD. They differ by risk premia. Horizon (1y vs lifetime) must be stated.
Why it matters
Pricing, IFRS 9, and limit systems all consume a PD. Mixing the two PDs is a category error.
Case
A name with 1% real-world 1y PD and 4% risk-neutral PD from CDS. The gap is the premium. Trading the CDS is trading that gap plus jump risk.
How to read it
Which PD, which horizon, which default definition. Then LGD. A PD without those is a mood.
No query has been run yet. Which is tragically normal for most knowledge systems, but we are trying to evolve past decorative databases.