CFA Level I · CFA Level I Exam · Fixed-Income Cash Flows and Types
A bond's legal documentation sets out the issuer's promises regarding repayment and the actions it must take or avoid during the bond's life. Which of the following provisions is most likely a negative covenant?
Limiting additional debt the issuer may incur is a negative covenant. Negative covenants prohibit or restrict issuer actions that could harm bondholders. Maintaining insurance and delivering audited statements require the issuer to act, so they are affirmative covenants.
- AMaintain insurance on pledged assets
- BLimit additional debt the issuer may incurCorrect
- CDeliver audited financial statements annually
Explanation
Negative covenants restrict actions, such as limits on additional borrowing, dividends or asset sales. Maintaining insurance and delivering audited statements are affirmative covenants because they require the issuer to do something.
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