Question

In a bond covenant, a city agreed to create and maintain a $2 million reserve. these funds can be used

A. only to make the final year s interest and principal payments on the bonds.
B. only to make the interest and principal payments on the bonds in a year in which the city is unable to make the required debt service payments from other resources.
C. to make either the final year s interest and principal payments on the bonds or in the event that the city is unable to make the interest and principal payments on the bonds.
D. by the city as it chooses since it legally belongs to the city

Answer 1

In the context of a bond covenant, the $2 million reserve is earmarked to ensure bondholders are paid when the city cannot make payments from other resources, fulfilling its debt obligations.

Therefore, the correct answer is: option B). only to make the interest and principal payments on the bonds in a year in which the city is unable to make the required debt service payments from other resources.

Step-by-step explanation:

A bond covenant is a legally binding term of agreement between a bond issuer and a bondholder. Bond covenants are designed to protect the interests of both parties.

In this case, the city agreed to create and maintain a $2 million reserve. These funds are set aside by a city to ensure that bondholders are paid the interest and principal on the bonds in case the city cannot make the required debt service payments from other resources.

The reserve is not for discretionary purposes but is specifically earmarked to maintain the city's ability to meet its debt obligations under stressed financial conditions.

The reservation of such funds demonstrates fiscal responsibility and reassures bondholders about the safety of their investment.