- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 42. Fixed-Income Securities: Defining Elements
- Subject 2. Bond Indenture
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 |