Protective covenants prevent bond issuers from irresponsible overborrowing behavior and are offered for the benefit of:
A) common shareholders.
B) preferred shareholders.
C) bondholders.
D) both common and preferred shareholders.

Question

Quizplus · Accepted Answer

Protective covenants are typically included in bond indentures to protect bondholders from the irresponsible borrowing behavior of the issuer. These covenants often establish financial thresholds and require the issuer to maintain certain financial ratios. If the issuer violates the covenants, bondholders may have the right to accelerate repayment of the bonds or take other legal action to protect their interests. Protective covenants do not provide any direct benefits to common or preferred shareholders.

Protective Covenants Prevent Bond Issuers from Irresponsible Overborrowing Behavior and Are