What are bond covenants?

Bond covenants refer to the restrictions and requirements outlined in bond agreements that must be adhered to by the issuer. These covenants serve to protect the interests of bondholders by ensuring that the issuer maintains certain financial standards and operational practices throughout the life of the bond. For instance, covenants may include stipulations about maintaining certain levels of revenue, limitations on additional borrowing, or requirements for financial reporting.

These restrictions are crucial because they help to mitigate risk for investors by ensuring that the issuer remains financially stable and does not take actions that could jeopardize its ability to repay the bond. This aspect of bond covenants contributes to the overall trust and transparency in municipal finance, reinforcing the issuer's commitment to meeting its debt obligations.