CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
A bond indenture includes a provision that restricts the issuer from paying dividends above a set percentage of net income. This provision is best described as a:
This is a negative covenant. Negative covenants prohibit or limit issuer actions that could harm creditors, such as paying excessive dividends, taking on more debt or selling key assets. Affirmative covenants instead require actions, and a cross-default clause concerns default on other debt.
- Anegative covenantCorrect
- Baffirmative covenant
- Ccross-default clause
Explanation
Negative covenants restrict issuer actions such as limiting dividends, additional debt or asset sales. Affirmative covenants require actions, such as paying taxes or maintaining insurance. A cross-default clause links default on one obligation to default on others and is not a restriction on dividends.
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