A downgrade is the process of reducing the bond rating of a debt instrument. Bond rating agencies constantly monitor the credit status of issuers of debt instruments. If the financial condition of one deteriorates they issue a credit alert followed by a downgrade.
Because bond rating determines the market interest rate of a debt instrument, the downgrade causes the market value of the instrument to fall so buyers receive the new market yield. Hence, a downgrade is a significant event for a debt security and for its issuer.
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