Bond Covenant

A bond covenant is a promise made by a bond issuer to the bondholders. These promises are typically included in the bond indenture, which is the legal contract that governs the bond issuance. Covenants can be used to protect bondholders from various risks, such as default, dilution, and changes in control.

There are many different types of bond covenants, but some of the most common include:

• Negative covenants: These covenants restrict the issuer from taking certain actions that could jeopardize the bondholders' interests. For example, a negative covenant might prohibit the issuer from taking on too much debt, selling assets, or paying dividends.
• Positive covenants: These covenants require the issuer to take certain actions that benefit the bondholders. For example, a positive covenant might require the issuer to maintain a certain level of liquidity or to make regular interest payments.

Bond covenants are important because they help to protect bondholders from potential risks. By understanding the covenants in a bond, investors can make informed decisions about whether or not to invest in that bond.

In addition to the specific covenants that are included in a bond indenture, there are also some general principles that apply to all bond covenants. For example, covenants must be reasonable and enforceable. If a court finds that a covenant is unreasonable or unenforceable, it may be struck down.

Bond covenants can be a complex topic, but they are an important part of the bond market. By understanding the basics of bond covenants, investors can make informed decisions about whether or not to invest in bonds.