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Covenants

• Are formal conditions or clauses which are written into credit agreements. Often the document which contains these covenants and terms is called the indenture.

• 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).

 
 Embedded terms in definition
 Affirmative covenant
Bond indenture
Bond
Credit
Indenture
Issuer
Negative covenant
Preferred stock agreement
Preferred stock
Stock
Take
 
 Referenced Terms
 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.

 Debt covenants: Debt Covenants spell out the details of the debt contract. For instance, the level and the timing of the promised interest rate and principal payments are explicitly stated. The covenants restrict the ability of the borrower to increase the risk of the firm after debt is taken on, or drain the assets of the firm. They are also designed to provide early warning signals if the health of the firm begins to weaken.

 
 Related Terms
 Debt covenants
Restrictive covenants

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