CFA Practice Question

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CFA Practice Question

Which of the following is not an example of an affirmative (positive) covenant?
A. The requirement to maintain a minimum level of working capital and net worth
B. The requirement to furnish bondholders with a copy of the firm's annual accounts
C. The requirement to limit dividends to net income
Explanation: Restrictions on distributions to shareholders include dividends and other payments to shareholders, such as share repurchases.

User Contributed Comments 11

User Comment
KD101 Copy of my account doesn't help you revover your money back - It helps you see what is going on. On the other hand, by restricting dividends to common shareholders, I may be left with more money
shawn what are you talking about?
G3cc0 if divs are limited to ni, the case may arise when bondholders don't get paid. that's a negative covenant.
tiptop In fact, bondholders are paid before the shareholders so it doesn't matter whether anything is paid to shareholders on a year to year basis unless the money has to be reinvested for projects that will help the companys' cash flow.
Xocrevilo The other choices are all issues which a bondholder would be likely to pay close attention to, as they all concern the balance sheet and the solvency of the company/ability to finance debt, etc. The last choice is of much more concern to shareholders than bondholders (though not irrelevant for both!).
ElCarnal I think it's more about FORCING the company to do something (positive covenant) versus PREVENTING the company from doing something (negative covenant)
jmcarr02 Negative covenants are limitations on management actions (such as maintaning minimum working capital, limitations on dividend, and maintaining a minimum level of net worth). Positive covenants are prescribed management actions: such as providing financial statement.
MattNYC It helps to do this:

for each choice, start out by saying "The firm must do..........." and "The firm must not do........"
kiransp64 Maintaining min level of working capital & net worth = positive covenant
jonnyp Associate the word "limitations" with negative covenants
dini85 As per book
negative - prohibition on the borrower
positive - borrower promises to perform
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