CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
An investor holds a bond whose indenture includes a covenant restricting the issuer from taking on additional debt above a stated leverage ratio. This covenant is best described as:
The covenant is a negative covenant that protects bondholders. It restricts the issuer from actions, here borrowing above a leverage limit, that could weaken its ability to repay. Affirmative covenants instead require the issuer to perform specified actions.
- Aan affirmative covenant protecting the issuer's operations
- Ba negative covenant protecting bondholdersCorrect
- Ca call provision benefiting the issuer
Explanation
Negative covenants prohibit the issuer from certain actions, such as issuing excess debt, which protects bondholders' claims. Affirmative covenants require actions like paying interest or maintaining insurance. A debt limit is not a call provision.
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