A contractual promise or restriction binding a borrower or issuer.
A covenant is a contractual promise or restriction in a loan or bond agreement binding the borrower/issuer. Positive covenants require actions (e.g., maintaining insurance); negative covenants restrict actions (e.g., limiting debt issuance). Covenants protect lenders by ensuring borrowers maintain financial health and don't take excessively risky actions. Violating covenants can trigger default. Strong covenants indicate lender protection; weak covenants (common for borrowers with strong credit) indicate lender confidence.