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Basic Question 18 of 20
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 20
| 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. |
| ascruggs92 | thud is correct, I'm surprised given all the other rationales that everybody has neglected his response. B describes an affirmative covenant, but the question asks for an affirmative FINANCIAL covenant. A financial covenant refers to a covenant that places a mandate or limitation on use of financial assets (i.e. maintaining certain liquidity ratios or a minimum amount of cash). Requiring audited financial statements on a timely basis has nothing to do with use of financial assets, it has to do with disclose of use of financial assets. The answer is not B because D is "more right," it is just an incorrect answer meant to trick us, which it looks like it tricked most of us. |
| walterli | Deja Vu |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
Learning Outcome Statements
describe credit risk and its components, probability of default and loss given default
CFA® 2024 Level I Curriculum, Volume 4, Module 14.