Glossary of Municipal Securities Terms


Contractual obligations set forth in a bond contract. Covenants commonly made in connection with a bond issue may include covenants to charge fees sufficient to provide required pledged revenues (called a “rate covenant”); to maintain casualty insurance on the project; to complete, maintain and operate the project; not to sell or encumber the project; not to issue parity bonds or other indebtedness unless certain tests are met (“additional bonds” or “additional indebtedness” covenant); and not to take actions that would cause tax-exempt interest on the bonds to become taxable or otherwise become arbitrage bonds (“tax covenants”). A covenant whereby a party is affirmatively obligated to undertake a duty in order to protect the interests of bondholders (e.g., to maintain insurance) is referred to as an “affirmative” or “protective covenant.” A covenant whereby the issuer obligates itself to refrain from performing certain actions (e.g., not to sell the project) is referred to as a “negative covenant.”

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