Answer: loss severity

**Explanation:** **Loss severity** (also known as loss given default or LGD) refers to the portion of a bond's value that an investor loses when a default occurs. It represents the actual financial loss experienced by the investor after accounting for any recovery value. **Why other options are incorrect:** - **A. Default risk:** This refers to the probability or likelihood that a borrower will default on their debt obligations, not the actual loss amount. - **C. Expected loss:** This is a broader concept that combines both the probability of default (default risk) and the loss severity. Expected loss = Probability of Default × Loss Given Default. It represents the average loss expected over time, not the specific portion lost in a default event. **Key Distinction:** - **Loss severity** = How much you lose WHEN default happens - **Default risk** = How LIKELY default is to happen - **Expected loss** = Probability × Severity (the statistical expectation) In fixed income analysis, understanding loss severity is crucial for assessing credit risk and pricing bonds appropriately.

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