Rate Covenant Protections in Municipal Revenue Indentures
A municipal toll bridge authority issues revenue bonds. The bond resolution includes a rate covenant. What does this covenant legally require the issuer to do?
A rate covenant promises bondholders that the authority will adjust and maintain fees/tolls high enough to cover all operating costs AND meet debt service coverage ratios (e.g. 1.25x or 1.50x debt service).
Complete Analysis & Legal Rationale
Protective covenants in revenue bonds safeguard investors. Other covenants include maintenance covenants, insurance covenants, non-discrimination covenants, and annual audit covenants.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately defines a rate covenant ensuring debt service coverage.
Freezing rates would breach the covenant if costs rise and revenues fall short.
Surpluses in general city accounts do not govern revenue facility pricing.
Fictitious political distractor.