An analyst reviews a corporate bond indenture that
An analyst reviews a corporate bond indenture that contains these two covenants:
1) The borrower will pay interest semi-annually
and principal at maturity.
2) The borrower will not incur additional debt if its debt/capital ratio is more than 50%.
What types of covenants are these?
A. Both are affirmative covenants.
B. Covenant 1 is negative and Covenant 2 is affirmative.
C. Covenant 2 is negative and Covenant 1 is affirmative.
参考解答
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2024-11-14 22:30:28
Ans:C;
Affirmative covenants include
1) the timely payment of principal and interest.
2)
the maintenance of certain financial ratios (for example, the borrower might promise to maintain the company’s current ratio at a value of two or higher. If this value of the current ratio is not maintained, then the bonds could be considered to be in (technical) default.)
Negative covenants include
1) restrictions on asset sales (the company can't sell assets that have been pledged as collateral),
2) negative pledge of collateral (the company can't claim that the same assets back several debt issues simultaneously),
3) restrictions on additional borrowings (the company can't borrow additional money unless certain financial conditions are met).
Therefore Covenant 1 is affirmative and Covenant 2 is negative.
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