Legal Definitions - bond covenant

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.