When to worry about a bond downgrade

July 18, 2008

A 30-year corporate bond I own was rated AA when I bought it five years ago, but now I hear it may be downgraded to A. If that happens, how much will the price change affect the bond's market price?

A 30-year corporate bond I own was rated AA when I bought it five years ago, but now I hear it may be downgraded to A. If that happens, how much will the change affect the bond's market price?

Probably very little. An A-rated bond is still considered sound, and since no one can predict what will happen to a company or the economy several years in the future, it's not unreasonable or unusual for bond ratings to change over time. Although slipping one notch isn't necessarily a red flag, you do need to pay attention if a series of slips occurs over a short period, since that may signal that the issuer is getting into trouble. The same is true if the bond rating drops more than a step (from A to BBB, for example) in one shot or falls below investment grade.