IMDP Risk Management Practice Test

Exposure at default is the amount the lender would be exposed to if the borrower defaults. For a standard loan, this equals the outstanding balance at the time of default—the principal still owed plus any accrued interest and fees up to that moment. This figure matters because it represents the potential loss the lender faces at default and, together with how much of that exposure would be recovered (LGD) and how likely default is (PD), drives credit losses and the capital a bank must hold. In revolving facilities, EAD can reflect expected future drawings up to the credit limit, but the fundamental concept is the exposure on default. It’s not about the equity contributed by lenders, nor the exposure prior to issuing the loan, nor a discount rate used in valuation; those describe different ideas, while EAD specifically captures what could be at risk when default occurs.