Asked by arjun trivedi on Jun 11, 2024
Verified
What is the main purpose of restrictive covenants?
A) They protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
B) They protect bondholders by expanding the power of managers. Such covenants are spelled out in bond indentures.
C) They protect bond issuers by constraining the actions of managers. Such covenants are spelled out in bond indentures.
D) The bond market from adverse price moves due to inefficient investment decisions of managers and investors.
Bondholders
Individuals or institutions that hold the debt securities issued by corporations or governments, entitling them to interest payments and the repayment of principal.
Restrictive Covenants
Clauses in contracts that restrict the actions of parties, often found in employment and property agreements to protect business interests or property use.
Bond Indentures
The legal and binding agreement between a bond issuer and the bondholders detailing the terms and conditions of the bond.
- Explain the importance and functions of bond covenants and how they protect bondholders.
Verified Answer
KO
Kalista OwensJun 15, 2024
Final Answer :
A
Explanation :
Restrictive covenants are included in bond indentures to protect bondholders by limiting the actions of managers, ensuring that the company does not take on excessive risk that could jeopardize its ability to meet its debt obligations.
Learning Objectives
- Explain the importance and functions of bond covenants and how they protect bondholders.