Bond Covenant

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Definition: Bond Covenant

Bond covenants are certain restrictions as per the agreement between the issuer and the holder. These restrictions are legally binding and can be of two forms; negative covenants are activities that the issuer is forbidden to perform whereas positive covenants are activities that the issuer is supposed to confirm to.

One of the most common covenants is the restriction on taking on additional debt using a restriction on the debt/equity value.

In case of breach of a covenant, a penalty is imposed on the issuer and the issuer is said to be in default.

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