Probability of default: issuer vs volume weighted

Question

Some probability of default are issuer-weighted and some are volume-weighted. I don't understand what this means. I had a look into Moody's documentation available here:

https://www.moodys.com/sites/products/ProductAttachments/DRD/CTM_Methodology.pdf

However I still don't understand the part explaining it:

With the model described in this paper, users are able to forecast the probability of rating transitions and default at the issuer level and at the portfolio level. The portfolio forecast can be equally-weighted across issuers as well as volume weighted.

Answer 1

If there are 10 issuers and one defaults this year, the issuer weighted probability of default is 0.1. But if the one issuer that defaults is one with a larger than average amount of debt outstanding, the dollar volume weighted rate of default for the year is going to be > 0.1.

Moody's tries to predict the default of issuers, so they mostly work with issuer weighted probability of default. But they also provide value weighted probabilities, which may be more relevant to investors who own debt somewhat in proportion to the amount of debt outstanding.

In summary: One is the percentage of issuers that default, the other the percentage of debt that goes bad.