Banks can figure out how much money they might lose on loans by looking at how many loans actually go bad. They use a bunch of different factors to predict these losses, which is important for banks and other institutions. Two big parts of this prediction are the chance of a loan going bad (Probability of Default) and how much money will be lost if it does (Loss Given Default). These factors are part of the credit spread, which is the difference in prices between safe and risky bonds. This article talks about the theory behind Loss Given Default.