CFA Practice Question

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CFA Practice Question

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).
Correct Answer: D

This ratio is an example of a financial test. If the debtor's working capital ratio falls below the minimally specified amount, the loan agreement may be subject to termination or modification. It is also an affirmative covenant since it requires the borrower to take a certain action.

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
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