Published Aug 10, 2023 A bond covenant is a legally binding agreement between a bond issuer and a bondholder that outlines the rights and responsibilities of each party. That means it defines the conditions under which the bond issuer can issue new debt, pay dividends, or take other actions that may affect the bondholder’s investment. To illustrate this, let’s look at a bond issued by a company. The bond covenant may specify that the company is not allowed to issue any new debt without the bondholder’s consent. That means the bondholder has the right to approve or reject any new debt the company wants to issue. In addition, the bond covenant may also specify that the company is not allowed to pay dividends to its shareholders if the bondholder’s interest payments are overdue. Bond covenants are important for both bond issuers and bondholders. For the issuer, they provide a way to protect their interests and ensure that the bondholder does not take any action that could harm the issuer’s financial position. For the bondholder, they provide a way to protect their investment and ensure that the issuer does not take any action that could harm the bondholder’s investment. Thus, bond covenants are an important part of the bond market and help to ensure that both parties are treated fairly.Definition of Bond Covenant
Example
Why Bond Covenants Matter
Financial Economics