FRM Part I · FRM Exam Part I · Corporate Bonds
Which feature of a corporate bond issue is designed primarily to protect bondholders from actions by the issuer that could increase default risk, such as issuing additional senior debt or paying excessive dividends?
Restrictive covenants in the bond indenture protect bondholders by limiting issuer actions that raise default risk, such as taking on additional senior debt, paying excessive dividends or selling key assets. Call, put and conversion features do not restrain management behavior.
- ARestrictive covenants in the indentureCorrect
- BA call provision
- CA put provision
- DA conversion option
Explanation
Negative (restrictive) covenants limit issuer behavior, such as additional borrowing, dividend payouts and asset sales, protecting creditors. Call provisions benefit the issuer, put provisions let holders sell back at a set price but do not restrict conduct, and conversion options give equity participation.
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