Covenants in a bond contract restrict the actions that management of a firm can take that would benefit the debtholders of a firm at the expense of the equity holders of the firm.

Question

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Covenants in a bond contract are designed to protect the interests of the debtholders by restricting certain actions of the firm that could jeopardize the firm's ability to repay the debt. They do not specifically aim to benefit debtholders at the expense of equity holders but to ensure the firm's financial stability and ability to meet its debt obligations.

Covenants in a Bond Contract Restrict the Actions That Management