Conditional default rate (CDR) is calculated using monthly data. For a given month, the annualized CDR is defined as:

where the liquidation rate is the sum of all charge-offs in a given month divided by the start of month balance. This can then be rewritten as:

where* Start of Month Balance* is the sum of all active loan balances at the beginning of the month, and excludes any defaulted/charged-off loans from previous periods.

Note that we do not make the distinction between charge-offs and defaults, as we have seen the majority of originators that provide a "default" designation typically use it only as a placeholder. The loan is then officially charged-off on a periodic basis (depending on the originator) each month.

In calculating rolling CDR, the following equation is used:

where *n* is the number of months of data used. The calculation compounds each month’s CDR, then annualizes the resulting product.