What do covenants pertain to?

Covenants typically refer to legally binding agreements or promises that are included in bond contracts, specifically related to the issuance of municipal bonds. In the context of public finance and governmental budgeting, covenants are used to outline various conditions that the issuer agrees to uphold in order to provide assurances to bondholders. This can include stipulations about the use of funds, maintenance of certain financial ratios, or requirements for reporting financial information.

By establishing these covenants, issuers aim to maintain their creditworthiness and ensure that they fulfill their obligations to bondholders. This adherence helps to protect the interests of investors and contributes to a stable financial environment for governmental entities. The focus on bonds and their associated covenants underscores the importance of risk management in public finance, making this option the most relevant and accurate choice.