To understand the concept of downgrading a bond, one needs to look at the grading system. Bonds are brought to market through a vehcile known as a syndicate, that is brokers who work in conjunction with either a government or non-government entity to bring the paper to the market. During this process and all the steps it entails the issuer will send information to one or more bond rating agencies which will take a look at the proposed issue and give it a score, based on several factors relating to interest payments, security of principle, stablity of the issue, and so forther. There are several bond rating agencies, but there are 4 main ones Moody's, Standard & Poors [the 2 biggest], Fitch, and Duff&Phelps. In many cases, requests will be sent to two or more agencies. Prior to the announcement of the sale of the bond, the final rating will be assigned to the bond. In most cases, if two agencies are used, generally the ratings are the same or about the same and typically the lower rating is used if the discrepancies between differing ratings can't be resolved. Below are the rating schemes Moody's uses. (The other 3 agency rating schemes are very similar) Moody's Bond Ratings are intended to characterize the risk of holding a bond. These ratings, or risk assessments, in part determine the interest that an issuer must pay to attract purchasers to the bonds. The ratings are expressed as a series of letters and digits. Here's how to decode those sequences. Rating "Aaa" Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Rating "Aa" Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. Rating "A" Bonds which are rated A possess many favorable investment attributes and are considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Rating "Baa" Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected not poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Rating "Ba" Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. Rating "B" Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments of of maintenance of other terms of the contract over any long period of time may be small. Rating "Caa" Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Rating "Ca" Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Rating "C" Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Rating "D" Not often used but shows when a bond is in default. A Moody rating may have digits following the letters, for example "A2" or "Aa3". According to Fidelity, the digits in the Moody ratings are in fact sub-levels within each grade, with "1" being the highest and "3" the lowest. So here are the ratings from high to low: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, and so on. So, when your bond has been down graded it has moved from one rating into another. For example, lets say you have a bond rated as Aa1 and there is some problem that arises that causes future payments to be jeopardized or come into question. Based on a new analysis, a new rating is assigned to the bond. If the problems are minor, it could simply go from Aa1 to Aa2 or even Aa3. Rarely are there drastic downgrades, say from Aa1 to Baa because the reasons that would necessitate such an event would have been identified on the initial analysis. Bonds can also be upgraded--typically you will see a bond go from a C rating to a B3 rating and so for.

IT MEANS THAT DUE TO THE ECONOMY YOU CANT GET FULL VALUE OUT OF YOUR BOND.