Corporate Default Risk Service
1. What is Moody’s definition of default for the Default Risk Service? Is the definition the same for
other risk management products?
The Default Risk Service uses the same definition for default as other Moody’s risk management products.
Moody's definition of default includes three types of credit events:
■ A missed or delayed disbursement of interest and/or principal, including delayed payments made
within a grace period;
■ Bankruptcy, administration, legal receivership, or other legal blocks (perhaps by regulators) to the
timely payment of interest and/or principal; or
■ A distressed exchange occurs where: (i) the issuer offers debt holders a new security or package
of securities that amount to a diminished financial obligation (such as preferred or common
stock, or debt with a lower coupon or par amount, lower seniority, or longer maturity); or (ii) the
exchange had the apparent purpose of helping the borrower avoid default.
2. Why are Moody’s default rates based on issuers instead of bonds?
■ The likelihood of default is primarily driven by the liability structure and operating performance of a firm. At
the same time, firms often default on all their debt due to cross default provisions in bond indentures.
(For more detail, see Senior Ratings Algorithm: “Why does Moody’s choose to use senior unsecured (or
estimated senior unsecured) issuer-level ratings rather than bond-level ratings?”)
■ However, Moody’s does also calculate dollar volume weighted default rates.
3. What is a cohort?
A pool of issuers formed on the basis of the rating held on a given calendar date (or set of dates).
Frequently Asked Questions
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Moody’s Corporate Default Risk Service
4. How are Moody’s default rates calculated?
Moody’s uses a discrete-time hazard rate method to calculate its cumulative default rates. Cumulative default
rates are calculated by compounding constituent marginal default rates. Moody’s calculation method controls