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Bond covenant

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Definition of Bond covenant

Bond Covenant Image 1

Bond covenant

A contractual provision in a bond indenture. A positive covenant requires certain actions, and
a negative covenant limits certain actions.



Related Terms:

Positive covenant (of a bond)

A bond covenant that specifies certain actions the firm must take. Also called
and affirmative covenant.


Affirmative covenant

A bond covenant that specifies certain actions the firm must take.


Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.


Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.


Limit price

Maximum price fluctuation
Limitation on asset dispositions A bond covenant that restricts in some way a firm's ability to sell major
assets.



Limitation on asset dispositions

A bond covenant that restricts in some way a firm's ability to sell major assets.


Limitation on liens

A bond covenant that restricts in some way a firm's ability to grant liens on its assets.


Bond Covenant Image 2

Limitation on merger, consolidation, or sale

A bond covenant that restricts in some way a firm's ability to
merge or consolidate with another firm.


Limitation on sale-and-leaseback

A bond covenant that restricts in some way a firm's ability to enter into
sale and lease-back transactions.


Limitation on subsidiary borrowing

A bond covenant that restricts in some way a firm's ability to borrow at
the subsidiary level.


Negative covenant

A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.


Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any
liens that may be granted in the future to any other currently unsecured lenders.


Accrual bond

A bond on which interest accrues, but is not paid to the investor during the time of accrual.
The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.


Bearer bond

bonds that are not registered on the books of the issuer. Such bonds are held in physical form by
the owner, who receives interest payments by physically detaching coupons from the bond certificate and
delivering them to the paying agent.


Bond

bonds are debt and are issued for a period of more than one year. The U.S. government, local
governments, water districts, companies and many other types of institutions sell bonds. When an investor
buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the
loan at a specified time. Interest-bearing bonds pay interest periodically.


BOND

A long-term, interest-bearing promissory note that companies may use to borrow money for periods of time such as five, ten, or twenty years.


Bond Covenant Image 3

Bond

A long-term debt instrument in which the issuer (borrower) is
obligated to pay the investor (lender) a specified amount of
money, usually at specific intervals, and to repay the principal
amount of the loan at maturity. The periodic payments are based
on the rate of interest agreed upon at the time the instrument is
sold.


bond

Security that obligates the issuer to make specified payments
to the bondholder.



Bond

A financial asset taking the form of a promise by a borrower to repay a specified amount (the bond's face value) on a maturity date and to make fixed periodic interest payments.


Bond

Usually a fixed interest security under which the issuer contracts to pay the lender a fixed principal amount at a stated date in the future, and a series of interest payments, either semi-annually or annually. Interest payments may vary through the life of bond.


bond

A debt security issued by a government or company. You receive regular interest payments at specified rates while you hold the bond and you receive the face value when it matures. Short-term bonds mature in less than five years; medium-term bonds mature in six to ten years; and long-term bonds mature in eleven years or greater.


Bond

Fixed interest security issued by a corporation or government, having a specific maturity date.


Bond agreement

A contract for privately placed debt.


Bond-equivalent basis

The method used for computing the bond-equivalent yield.


Bond equivalent yield

bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.


Bond-equivalent yield

The annualized yield to maturity computed by doubling the semiannual yield.


Bond Equivalent Yield

bond yield calculated on an annual percentage rate method


Bond indenture

The contract that sets forth the promises of a corporate bond issuer and the rights of
investors.



Bond indexing

Designing a portfolio so that its performance will match the performance of some bond index.


Bond points

A conventional unit of measure for bond prices set at $10 and equivalent to 1% of the $100 face
value of the bond. A price of 80 means that the bond is selling at 80% of its face, or par value.


Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.


BONDPAR

A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the
individual securities held in the portfolio. bondPAR decomposes the return into those elements beyond the
manager's control--such as the interest rate environment and client-imposed duration policy constraints--and
those that the management process contributes to, such as interest rate management, sector/quality allocations,
and individual bond selection.


Bonds payable

Amounts owed by the company that have been formalized by a legal document called a bond.


Brady bonds

bonds issued by emerging countries under a debt reduction plan.


Bull-bear bond

bond whose principal repayment is linked to the price of another security. The bonds are
issued in two tranches: in the first tranche repayment increases with the price of the other security, and in the
second tranche repayment decreases with the price of the other security.


Bulldog bond

Foreign bond issue made in London.


Callable bond

A bond that allows the issuer to buy back the bond at a
predetermined price at specified future dates. The bond contains an embedded
call option; i.e., the holder has sold a call option to the issuer. See Puttable
bond.


callable bond

bond that may be repurchased by the issuer before maturity at specified call price.


Canada Savings Bonds

A bond issued each year by the federal government. These bonds can be cashed in at any time for their full face value.


Collateral trust bonds

A bond in which the issuer (often a holding company) grants investors a lien on
stocks, notes, bonds, or other financial asset as security. Compare mortgage bond.


Completion bonding

Insurance that a construction contract will be successfully completed.


Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.


convertible bond

bond that the holder may exchange for a specified number of shares.


Convertible bonds

bonds that can be converted into common stock at the option of the holder.


Convertible eurobond

A eurobond that can be converted into another asset, often through exercise of
attached warrants.


Corporate bonds

Debt obligations issued by corporations.


Coupon Bond

Any bond with a coupon. Contrast with discount bond.


Covenants

Provisions in a bond indenture or preferred stock agreement that require the bond or preferred
stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified
actions (negative covenants).


Covenants

Promise usually made in a contract whereby a party to the contract promises to do or not to do specified things.


Cushion bonds

High-coupon bonds that sell at only at a moderate premium because they are callable at a
price below that at which a comparable non-callable bond would sell. Cushion bonds offer considerable
downside protection in a falling market.


Debenture bond

An unsecured bond whose holder has the claim of a general creditor on all assets of the
issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral
trust bonds.


Deep-discount bond

A bond issued with a very low coupon or no coupon and selling at a price far below par
value. When the bond has no coupon, it's called a zero coupon bond.


Discount bond

Debt sold for less than its principal value. If a discount bond pays no interest, it is called a
zero coupon bond.


Discount Bond

A bond with no coupons, priced below its face value; the return on this bond comes from the difference between its face value and its current price.


Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. Dollar" bonds, a common term of reference in the Eurobond market.


Dollar price of a bond

Percentage of face value at which a bond is quoted.


Equivalent bond yield

Annual yield on a short-term, non-interest bearing security calculated so as to be
comparable to yields quoted on coupon securities.


Eurobond

A bond that is (1) underwritten by an international syndicate, (2) offered at issuance
simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single
country.


Eurobond

A debt security issued in a market other than the home market of
the company issuing the security


eurobond

bond that is marketed internationally.


Eurodollar bonds

Eurobonds denominated in U.S.dollars.


Euroyen bonds

Eurobonds denominated in Japanese yen.


Extendable bond

bond whose maturity can be extended at the option of the lender or issuer.


Financial Covenant

A feature of a debt or credit agreement that is designed to protect the lender or creditor. It is common to characterize covenants as either positive or negative covenants.
A positive covenant might require that the debtor maintain a minimum amount of working capital.
A negative covenant might limit dividend payments that may be made.


Financial Covenants

A promise made related to financial conditions or events. Often a promise not to allow certain balance sheet items or ratios to fall below an agreed level. Usually found in loan documents, as a protection mechanism.


Flower bond

Government bonds that are acceptable at par in payment of federal estate taxes when owned by
the decedent at the time of death.


Foreign bond

A bond issued on the domestic capital market of anther company.


Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.


Full coupon bond

A bond with a coupon equal to the going market rate, thereby, the bond is selling at par.


General obligation bonds

Municipal securities secured by the issuer's pledge of its full faith, credit, and
taxing power.


Global bonds

bonds that are designed so as to qualify for immediate trading in any domestic capital market
and in the Euromarket.


Government bond

See: Government securities.


High-coupon bond refunding

Refunding of a high-coupon bond with a new, lower coupon bond.


High-yield bond

See:junk bond.


Income bond

A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.


Indexed bond

bond whose payments are linked to an index, e.g. the consumer price index.


Industrial revenue bond (IRB)

bond issued by local government agencies on behalf of corporations.


Insured bond

A municipal bond backed both by the credit of the municipal issuer and by commercial
insurance policies.


International bonds

A collective term that refers to global bonds, Eurobonds, and foreign bonds.


Investment grade bonds

A bond that is assigned a rating in the top four categories by commercial credit
rating companies. For example, S&P classifies investment grade bonds as BBB or higher, and Moodys'
classifies investment grade bonds as Ba or higher. Related: High-yield bond.


Junk bond

A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, Standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.


junk bond

bond with a rating below Baa or BBB.


Level-coupon bond

bond with a stream of coupon payments that are the same throughout the life of the bond.


Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.


Loan Covenants

Express stipulations included in loan agreements that are designed to monitor
corporate performance and restrict corporate acts, affording added protection to the lender.


Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.


Long bonds

bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.


Low-coupon bond refunding

Refunding of a low coupon bond with a new, higher coupon bond.


Mismatch bond

Floating rate note whose interest rate is reset at more frequent intervals than the rollover
period (e.g. a note whose payments are set quarterly on the basis of the one-year interest rate).


Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets.
Collateral trust bonds


Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for
special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.


Negative Loan Covenants

Loan covenants designed to limit a corporate borrower's behavior
in favor of the lender.


Positive Loan Covenants

Loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.


Premium bond

A bond that is selling for more than its par value.


Prerefunded bond

Refunded bond.


Protective covenant

A part of the indenture or loan agreement that limits certain actions a company takes
during the term of the loan to protect the lender's interests.


protective covenant

Restriction on a firm to protect bondholders.


Pure-discount bond

A bond that will make only one payment of principal and interest. Also called a zerocoupon
bond or a single-payment bond.


Put bond

A bond that the holder may choose either to exchange for par value at some date or to extend for a
given number of years.



 

 

 

 

 

 

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