The extent to which principal and accrued interest on a debt instrument that is in default can be recovered, expressed as a percentage of the instrument's face value. The recovery rate can also be defined as the value of a security when it emerges from default.
The recovery rate enables an estimate to be made of the loss that would arise in the event of default, which is calculated as (1 - Recovery Rate). Thus, if the recovery rate is 60%, the loss given default or LGD is 40%. On a $10 million debt instrument, the estimated loss arising from default is thus $4 million.