when a bond is issued the features of the bond are included in a document known as the bond deed or trust indenture the trust indenture highlights the responsibilities of an issuer and is overseen by a trustee to protect the interests of investors the trust indenture also stipulates any negative covenants that the issuer must adhere to 
for example the negative covenant may restrict the ability of the firm to issue additional debt specifically the borrower may be required to maintain a debt equity ratio of no more than 1 likewise negative pledge clauses in loan contracts restrict the borrower from using the pledged asset as collateral for other loans the lending agreement or indenture in which the negative covenant appears will also provide detailed formulas which may or may not conform to the generally accepted accounting principles gaap to be used to calculate the ratios and limits on negative covenants common restrictions placed on borrowers through negative covenants include preventing a bond issuer from issuing more debt until one or more series of bonds have matured also a borrowing firm may be restricted from paying dividends over a certain amount to shareholders so as not to increase the default risk to bondholders since the more money paid to shareholders the less available funds will be to make interest and principal payment obligations to lenders generally the more negative covenants exist in a bond issue the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors a negative covenant contrasts with a positive covenant which is a clause in a loan agreement that requires the firm to take certain actions for example a positive covenant might require the issuer to disclose audit reports to creditors periodically or to insure its assets adequately while positive or affirmative covenants do not limit the operations of a business negative covenants materially limit a business operations 