- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 14. Credit Risk
- Subject 1. Sources of Credit Risk
CFA Practice Question
Which one of the following statements is false with regard to debt covenants?
B. Negative covenants (e.g., 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 in comparison 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., 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 in comparison to a lower value.
D. Maintaining adequate insurance on assets serving as collateral in loan agreements is an example of an affirmative covenant.
Correct Answer: B
Negative covenants place direct restrictions on management actions and thus play a more significant role than affirmative covenants in loan agreements.
User Contributed Comments 4
| User | Comment |
|---|---|
| awoption | Negative covenants place direct restrictions on management actions and thus play a more significant role than affirmative covenants in loan agreements |
| Toni | - Def Technical Default - Affirmative Covenants - Negative Covenets more significant than affirmative because place restrictions |
| kofi | def. B cos no where does it give specifics abt loans. |
| Shalva | There is no evidence whether are negative covenants more important or not. Also, I don't think that these types of covenanats are comparable at all. But answ. B is true, because there is also no evidence to the contrary |