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Basic Question 1 of 4
Which one of the following statements regarding debt covenants is false?
B. Negative covenants (e.g., you 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 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., you 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 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 4
| User | Comment |
|---|---|
| udhay | what is fixed charge coverage ratio |
| nwarrior | The firm's ratio in regards to being able to pay their fixed charges. |
| HolzGe1 | fixed charge coverage ratio = (EBIT + lease payments) / (interest expense + lease payments) |
| khalifa92 | all negative covenants play a bigger role |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe the role of debt covenants in protecting creditors;
CFA® 2024 Level I Curriculum, Volume 3, Module 25.