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Basic Question 3 of 9
Which of the following would be classified as an affirmative financial covenant?
B. Provide audited financial statements on a timely basis.
C. Use the loan for the agreed-upon purpose.
D. Maintain a satisfactory working capital ratio (or current ratio).
A. Do not violate the lender's restriction on dividend payments.
B. Provide audited financial statements on a timely basis.
C. Use the loan for the agreed-upon purpose.
D. Maintain a satisfactory working capital ratio (or current ratio).
User Contributed Comments 21
| User | Comment |
|---|---|
| danlan | Keep assets in good condition and work order |
| aspazia | maintain a satisfactory working capital ratio |
| PRICHARD | why not b? |
| thud | maybe because b is not a FINANCIAL covenant? |
| manyu | I think b is also the answer because they are required to supply the statements too |
| heshammm | i think b is also a good answer , one of the examples shown in the notes : make reports |
| mysking | CFA Exam is about most appropriate, in this context, D has more weight than B even B is an answer. |
| thekapila | Well B says Audited reports..But in covenants its generally mentioned financial reports..thats why B is not correct. |
| Richie188 | B is a requirement for all companies not just bond issuers. |
| cong | Choose the most correct answer. |
| rhardin | I interpretted "maintain working capital ratio" as "do NOT let current liabilities get too high as to reduce the current ratio." How do I know how to interpret these questions? Does the word "maintain" mean it is an affirmative covenant? |
| cmon | i choosed B like evry other person!! |
| endurance | A lot of good inputs on this one, but no one seems to provide on what basis maintaing working capital ratio stands above audited financial statements. |
| NIKKIZ | D sounds more like 'do not allow the current ratio to fall below a certain level' to me in order for it to be enforceable. Properly written, it would be a negative financial covenant. |
| Prats123 | very true NIKKIZ |
| sogah | true that NIKKIZ |
| johntan1979 | Financial covenants = more about maintaining ratios This should come first, above other options. |
| gill15 | tricky. The reason D is correct is cause it says MAINTAIN working capital ratio --- its not a limitation. B is right as well unless CFA means financial statents are NOT considered Periodic reports. |
| vatsal92 | It's a financial covenant, so it has to be D. It won't be B because, that is a general affirmative covenant. |
| Chevy | Doesn't the trustee evaluate compliance with indenture and is thus "auditing" |
| merc5559 | @vatsal92 is correct with the reasoning for D over B |
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt
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.