CFA Practice Question

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CFA Practice Question

Which of the following would be classified as a 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 minimal 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 4

User Comment
uberstyle all of these are convenants - what are they if not financial? Thanks!
dravinskis "Financial" covenants refer to the financial statements, usually referring to a minimum or maximum ratio, ie. current ratio or debt-to-equity ratio.
robertucla No mention of Financial Covenant in Text
ascruggs92 Financial covenants refer to a financial metric of some sort being maintain (such as a ratio). Non-financial covenants are rules that do not pertain to a financial metric (paying interest on time, using the loan for agreed reason, providing financials on a timely basis).

A. is not a covenant, but would be if it were stated "Dividend payments cannot exceed 30% of N.I." or something of that nature
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