  While defaults are rare events, losses can be substantial even for credit
portfolios with a large number of contracts. Therefore, not only a good
evaluation of the probability of default is crucial, but also the severity of
losses needs to be estimated. The recovery rate is often modeled independently
with regard to the default probability, whereas the Merton model yields a
functional dependence of both variables. We use Moody's Default and Recovery
Database in order to investigate the relationship of default probability and
recovery rate for senior secured bonds. The assumptions in the Merton model do
not seem justified by the empirical situation. Yet the empirical dependence of
default probability and recovery rate is well described by the functional
dependence found in the Merton model.
