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Home > QFINANCE Dictionary > Definition of covenant

Definition of

covenant

Finance

legal financial agreement a financial agreement conditional on future events, for example, changes in the capital structure and rating of a firm, or fundamental changes in business strategy such as to divest of a major asset or to acquire another company. Covenants are frequently included in bond offerings or bank loan/syndication terms. In the United Kingdom, when payments are made by an individual under covenant to a charity, the charity can reclaim the tax paid by the donor.

covenant - Related Articles

  • Corporate Covenant and Other Embedded Options in Pension Funds

    Best Practice

    To start with, some of the most significant embedded options identified in pension funds are discussed. One of the most important embedded options the employer writes to the pension fund is the so-called parent guarantee, also known as the sponsor covenant. This is the guarantee to support
    By Theo Kocken

  • Minimizing Credit Risk

    Best Practice

    The restrictions imposed on the borrower (management) that are part of the terms and conditions of the lending or bond agreement are called covenants. Covenants deal with limitations and restrictions on the borrower’s activities. Affirmative covenants call on the debtor to make promises to do
    By Frank J. Fabozzi

  • Understanding Fixed-Charge Coverage

    Checklists

    Overall, the lower the ratio, the worse is the financial position of the company. Bond issues can contain covenants that set limits on how low the fixed-charge coverage ratio can fall. Such a covenant is designed to provide the lender with protection, so that the borrower’s financial position

  • Managing Interest Rate Risk

    Best Practice

    Investors do expect firms to take risks, especially with regard to their core business competencies. It may be that investors expect the firm to take interest rate risk. On the other hand, investors would probably not expect a firm to breach a financial covenant because of rising interest rates.
    By Will Spinney

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Definitions of ’covenant’ and meaning of ’covenant’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’covenant’ and other financial terms with our online QFINANCE Financial Dictionary.

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