What Is the Main Purpose of Restrictive Covenants

question 140

Multiple Choice

What is the main purpose of restrictive covenants?

• A)They protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
• B)They protect bondholders by expanding the power of managers. Such covenants are spelled out in bond indentures.
• C)They protect bond issuers by constraining the actions of managers. Such covenants are spelled out in bond indentures.
• D)The bond market from adverse price moves due to inefficient investment decisions of managers and investors.

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Definitions:

Call Protection

Call Protection is a feature of some bonds that prohibits the issuer from redeeming the bond before a specified period, protecting bondholders from early repayment.

Conversion Feature

Refers to an option within a bond or preferred stock that allows the holder to convert it into a certain number of shares of the issuing company's common stock.

Dividend Yield

The ratio of a company's annual dividends relative to its share price, indicating how much income investors are getting from their investment.

Yield-To-Maturity

Yield-to-maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures, incorporating both interest payments and the capital gain or loss realized upon maturity.