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Basic Question 2 of 9
Which one of the following statements is FALSE with regard to debt covenants?
B. Negative covenants (e.g., debtors are not permitted to pay out annual dividends in excess of 30% of net earnings) tend to play a less significant role in loan agreements than do affirmative covenants.
C. A creditor (lender) would prefer a higher fixed-charge coverage ratio in comparison to a lower value.
D. Maintaining adequate insurance on assets serving as collateral in loan agreements is an example of an affirmative covenant.
A. The term "technical default" is used to describe a situation where the debtor has violated one or more covenants in a loan agreement but continues to make all payments on a timely basis.
B. Negative covenants (e.g., debtors are not permitted to pay out annual dividends in excess of 30% of net earnings) tend to play a less significant role in loan agreements than do affirmative covenants.
C. A creditor (lender) would prefer a higher fixed-charge coverage ratio in comparison to a lower value.
D. Maintaining adequate insurance on assets serving as collateral in loan agreements is an example of an affirmative covenant.
User Contributed Comments 5
| User | Comment |
|---|---|
| awoption | Negative covenants place direct restrictions on management actions and thus play a more significant role than affirmative covenants in loan agreements |
| Toni | - Def Technical Default - Affirmative Covenants - Negative Covenets more significant than affirmative because place restrictions |
| kofi | def. B cos no where does it give specifics abt loans. |
| Shalva | There is no evidence whether are negative covenants more important or not. Also, I don't think that these types of covenanats are comparable at all. But answ. B is true, because there is also no evidence to the contrary |
| khalifa92 | they are more important because they have more contribution in the protection of bondholders interest. |
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Learning Outcome Statements
describe the contents of a bond indenture and contrast affirmative and negative covenants
CFA® 2025 Level I Curriculum, Volume 4, Module 1.