Bond Covenants

Bond covenants are agreements or rules in a bond contract that the borrower (usually a company or government) must follow to protect the interests of lenders (bondholders). These covenants set financial or operational requirements—like maintaining certain income levels or restricting additional borrowing—to ensure the borrower remains financially healthy and capable of repaying the bond. If the borrower violates these rules, it can lead to penalties or even default, allowing bondholders to take action to protect their investment. Essentially, covenants serve as safeguards to ensure responsible management and mitigate risk for investors.