Series 7 practice questionhardDebt Securities — Municipal Bonds — Revenue Bond Covenants
Which of the following protective covenants would most likely be found in a revenue bond indenture?
- AA rate covenant requiring the issuer to maintain user fees sufficient to cover debt service✓ Correct answer
- BA covenant prohibiting the municipality from levying property taxes
- CA covenant guaranteeing minimum investment returns
- DA covenant requiring voter approval for each interest payment
Explanation
Why A — A rate covenant requiring the issuer to maintain user fees sufficient to cover debt service
Revenue bond indentures typically include a rate covenant (or rate maintenance covenant) that requires the issuer to set and maintain fees, tolls, or other charges at levels sufficient to cover operating expenses and debt service payments. Other common revenue bond covenants include the additional bonds test, flow of funds provisions, maintenance covenant, and insurance covenant. These covenants protect bondholders by ensuring adequate revenue.
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