Answer-first summary for fast verification
Answer: Affirmative covenant that requires issuer to comply with all laws and regulations
The correct answer is **D**. Event risk refers to corporate actions such as restructurings, recapitalizations, mergers, acquisitions, leveraged buyouts, and share repurchases that may harm bondholders even if they benefit shareholders or management. Covenants that can mitigate event risk include: - **Poison put provisions** - **Maintenance of net worth clauses** - **Restrictions on asset divestitures, mergers, and acquisitions** An affirmative covenant requiring the issuer to comply with laws and regulations is generally a standard operating covenant and does **not** specifically mitigate event risk. So **D** is least likely to minimize event risk.
Author: Manit Arora
Ultimate access to all questions.
Question 507.2. In regard to event risk, Fabozzi writes "In recent years, one of the more talked-about topics among corporate bond investors is event risk. Over the last couple of decades, corporate bond indentures have become less restrictive, and corporate managements have been given a free rein to do as they please without regard to bondholders".
If included in the bond indenture, each of the following will mitigate event risk EXCEPT which is LEAST likely to mitigate (minimize) event risk?
A
Poison put provision
B
Maintenance of net worth clause
C
Restriction on asset divestitures, mergers and (asset) acquisitions
D
Affirmative covenant that requires issuer to comply with all laws and regulations
No comments yet.