Skip to content

FRM Part I · FRM Exam Part I · Corporate Bonds

A bond indenture includes a negative pledge clause. What does this covenant primarily do?

A negative pledge clause restricts the issuer from pledging its assets as security to other lenders unless existing bondholders are equally secured. This protects bondholders from being effectively subordinated. It is not a put, conversion, or call feature.

  1. AIt requires the issuer to repurchase the bonds if its rating is downgraded
  2. BIt prevents the issuer from pledging assets to other lenders in a way that would subordinate existing bondholdersCorrect
  3. CIt gives bondholders the right to convert the bonds into equity at a fixed price
  4. DIt allows the issuer to redeem the bonds at any time at par

Explanation

A negative pledge restricts the issuer from granting security over its assets to other creditors without equally securing the existing bondholders, protecting their relative claim. A rating-triggered repurchase is a put feature, conversion is a separate option, and redemption at par is a call feature.

Did you get it right without looking?

One question tells you little. A timed set on Corporate Bonds shows your real accuracy, how long you take and where you lose marks.

Practise Corporate BondsFree diagnostic mock

More Corporate Bonds questions