In the Fixed Income module, what is the purpose of bond covenants?

The purpose of bond covenants is to outline the rights and obligations of bondholders and issuers. These covenants serve as agreements that establish what both parties can and cannot do, which helps in protecting the interests of bondholders. By clearly defining these rights and obligations, covenants can include provisions such as limitations on additional borrowing, requirements for maintaining certain financial ratios, or stipulations about the sale of assets. These guidelines help to reduce risks associated with the bond investment and increase transparency and accountability, ultimately fostering trust between bondholders and issuers.

While some of the other options touch on aspects of bond management, they don't accurately reflect the specific role of covenants. For example, increasing bond interest rates is related to market conditions and risk appetites, not covenants themselves. Specifying trade durations pertains more to trading practices than to the legal agreements about bond terms. Eliminating concerns of default, while a potential outcome, is not the direct function of covenants; rather, they are designed to mitigate such risks through specific requirements and protections.