A change in the
rating of a
bond or other
security in a downward direction. For example, a bond that had previously been rated
AAA may be downgraded to
AA. Downgrades are considered detrimental because they mean the
ratings agency believes that the
issuer of the security is less likely to be able to fulfill its obligations, such as
coupon payments. A downgrade increases the
cost of funds for the issuer because
investors expect a higher
return in exchange for the increased risk on the
security. See also:
Upgrade.