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Basic Question 3 of 9

Which of the following would be classified as an affirmative financial covenant?

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
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Martin Rockenfeldt

Martin Rockenfeldt

Learning Outcome Statements

describe the contents of a bond indenture and contrast affirmative and negative covenants

CFA® 2024 Level I Curriculum, Volume 4, Module 1.