Canadian Securities Course (CSC) Level 1 Practice Exam

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What are protective provisions designed for in a bond contract?

To increase the issuer's liabilities
To protect the bond issuer from market risks
To guard against weakening the security holder's position
To dictate the bond's interest payment schedule

The correct answer is: To guard against weakening the security holder's position

Protective provisions in a bond contract are designed to guard against weakening the security holder's position. These provisions are included to protect the interests of bondholders by setting specific conditions that must be met by the issuer, such as limitations on additional debt issuance or requirements for maintaining certain financial ratios. This helps to mitigate risks for bondholders and ensure that their investments are adequately protected.