What is the definition of a bond covenant?

A bond covenant is fundamentally a legally binding term or condition included in a bond agreement. These covenants are established to protect the interests of both the bond issuer and the bondholders. They outline specific actions the issuer must take or refrain from taking, ensuring compliance with certain financial and operational criteria over the life of the bond. This could include maintaining certain financial ratios, restrictions on additional borrowing, or requirements for asset maintenance.

By delineating these terms, bond covenants help to mitigate risks associated with the investment, providing assurance to investors that the issuer will uphold certain commitments. When evaluating investment risks, understanding the nature and implications of bond covenants is essential for making informed decisions.