Covenant

A condition in a loan agreement that the borrower must meet or limits the borrower must keep to. A breach lets the lender act.

Where you will meet it

Covenant comes up in 16 learning outcome notes across the FRM syllabus. A few of them:

• Corporate Bonds
  FRM Part I · Financial markets and products

  “It sets out the terms of the issue, namely principal, coupon, maturity, security, call and sinking fund provisions, and the covenants.”

• How Do Firms Manage Financial Risk?
  FRM Part I · Foundations of risk management

  “Risk capacity is the most risk the firm could bear before breaching a constraint such as minimum capital or a covenant.”

• External and Internal Credit Ratings
  FRM Part I · Valuation and risk models

  “They use private information from the lending relationship, such as covenants and account behaviour, and they can be updated often.”

• Fundamentals of Credit Risk
  FRM Part II · Credit risk measurement and management

  “It is a failure to meet a contractual obligation such as a payment, or a breach of a covenant (a technical default).”

All terms beginning with C · FRM glossary

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