Asked by joban preet Thind on Jun 20, 2024
Verified
Which of the following is NOT a typical negative bond covenant?
A) The firm must limit dividend payments.
B) The firm cannot merge with another firm.
C) The firm cannot issue additional long-term debt.
D) The firm cannot allow its bond rating to fall below its initial level.
E) The firm cannot pledge any assets to other lenders.
Negative Bond Covenant
A condition in a bond agreement that forbids certain activities by the issuer, aimed at protecting the interests of the bondholders.
Dividend Payments
Distributions issued by a company to its stockholders, typically sourced from the firm's earnings.
- Become familiar with the different kinds of bond covenants and their significance for enterprises and stakeholders in the investment market.
Verified Answer
AH
AngelRose HarveyJun 26, 2024
Final Answer :
D
Explanation :
Negative bond covenants are designed to protect bondholders by limiting the actions of the borrower that could undermine the firm's financial stability or the bond's value. A typical negative covenant might restrict dividend payments, mergers, additional debt issuance, or pledging assets to other lenders to ensure the company maintains a certain level of financial health and does not undertake excessive risk that could jeopardize its ability to repay the bondholders. However, a covenant that prevents a firm's bond rating from falling below its initial level is not typical because bond ratings are determined by external agencies and can fluctuate based on a variety of factors beyond the firm's immediate control, such as changes in the economic environment or industry-specific risks.
Learning Objectives
- Become familiar with the different kinds of bond covenants and their significance for enterprises and stakeholders in the investment market.
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