Asked by Leslie Alaniz on Jun 15, 2024
Verified
Which one of the following is an example of a negative covenant?
A) Compliance with laws.
B) Maintenance of insurance.
C) Limit on capital expenditures.
D) Rights of inspection.
Negative Covenant
A clause in a loan agreement that restricts the borrower from certain actions, such as limiting dividend payments to shareholders or borrowing additional funds, to protect the lender's interests.
Capital Expenditures
Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment to improve its long-term operations.
Compliance
Adherence to laws, regulations, guidelines, and specifications relevant to an organization's business activities.
- Identify the types of covenants and the consequences of their violation.
Verified Answer
NC
Nathaniel CooperJun 16, 2024
Final Answer :
C
Explanation :
A negative covenant refers to a restriction or a limitation on the actions or decisions that a company can take. Option C, a limit on capital expenditures, is an example of a negative covenant because it restricts the company from spending beyond a specified limit. Options A, B, and D are examples of positive covenants as they involve commitments to specific actions or obligations. Compliance with laws, maintenance of insurance, and rights of inspection all require the company to take specific actions or follow certain rules.
Learning Objectives
- Identify the types of covenants and the consequences of their violation.