Restrictive Covenants Are Designed to Protect Both the Bondholder and the Issuer

question 19

True/False

Restrictive covenants are designed to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

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Definitions:

Liquidity Preference Theory

A theory that suggests investors demand a higher interest rate or premium on securities with longer maturities to compensate for the increased risk of holding them.

Term Structure

The relationship between interest rates or bond yields and different terms to maturity, represented graphically by the yield curve.

Interest Rates

The amount charged by lenders as a percentage of the amount borrowed, representing the cost of borrowing money.

Yields To Maturity

The total return anticipated on a bond if the bond is held until it matures, including all interest payments and the repayment of principal.