Polarization dependent loss (PDL) has been recognized as a critical issue because various inline optical components may have nonnegligible PDL effect that interacts with polarization mode dispersion (PMD). We investigated the impact of PMD-PDL interaction on degree of polarization (DOP), which is the most commonly used feedback signal in PMD compensation. The simulation results of a 40-Gb/s NRZ code optical transmission system show that the maximum PMD increases from approximately 40 ps to more than 45 ps, while minimum DOP declines from approximately 0.6 to approximately 0.2. The interaction of PMD and PDL also induces residual PMD underestimation of 5-8 ps, which causes degradation of PMD compensation performance.