Fallen Angel

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Definition of 'Fallen Angel'

In finance, a Fallen Angel is a bond that was originally issued with a high credit rating, such as an investment-grade rating, but has since been downgraded to a lower credit rating, typically to below investment-grade, also known as "junk" status.

A bond's credit rating reflects the issuer's ability to pay the bond's interest and principal payments on time. When a bond's credit rating is downgraded, it is seen as a sign that the issuer's financial situation has deteriorated, making it less likely that the issuer will be able to pay the bond's interest and principal payments on time. This increased risk can cause the bond's price to fall, hence the name "Fallen Angel."

Investors who own Fallen Angel bonds may face increased credit risk, which means there is a greater possibility of default and a risk of losing some or all of their investment. However, because these bonds were originally issued with a higher credit rating, they may still offer a higher yield than other junk bonds, which can make them attractive to some investors.

Fallen Angel bonds are often closely monitored by credit rating agencies and investors, as a large number of downgrades of high-rated bonds to junk status can be a sign of economic weakness or systemic risk in the market.

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