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Simple English definitions for legal terms
bond covenant
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A quick definition of bond covenant:
A bond covenant is a rule that helps protect people who have invested in bonds. It tells the company that issued the bonds what they can and cannot do, like not being allowed to borrow more money. This helps make sure that the people who invested in the bonds will get their money back.
A more thorough explanation:
A bond covenant is a provision in a bond indenture that outlines the terms and conditions of the bond. It is designed to protect bondholders by specifying what the issuer can or cannot do. For example, a bond covenant may prohibit the issuer from issuing more debt or require the issuer to maintain a certain level of financial performance.
For instance, let's say a company issues bonds to raise capital. The bond indenture may include a bond covenant that restricts the company from taking on additional debt beyond a certain amount. This protects bondholders from the company becoming overleveraged and potentially defaulting on the bonds.
Another example of a bond covenant is a requirement for the issuer to maintain a certain level of financial performance, such as a minimum level of revenue or profitability. This ensures that the issuer is able to meet its obligations to bondholders and reduces the risk of default.