FI: Affirmative VS Negative Covenants nothing, between, getting, should

hoangvu90

CFA Curriculum Vol 5 , Pg 335

Can some help me distinguish between affirmative and negative covenants?
I seem to be getting tripped off with the wording.

Prob 34 on pg 335 is confusing to me.
My guess is if a statement has "NO", then it is negative covenenat (that one should not do it).

But statement " dividend payout ratio below 30" seems to have nothing that tells me about "NO" or negative covenant

ryanlb

Affirmative is something you have done and will continue to do. E.g., you must have and keep insurance.

Negative is something you have not done, and will not do (restricted).

It's a tough one, but the negative is the restriction--you cannot exceed the limit.

I think you just have to decide whether the circumstance currently exists and that you are maintaining that state (affirmative), or whether there's restrictions to that state which makes it negative.

Another example, "interest payments must be made within 5 days of due" is a restriction to timely payments, and hence a negative covenant. "Maintan timely interest payments" is not restrictive, hence affirmative of some situation that cannot change.

Kapie

Affirmative Covenants: Force you to do stuff. Eg: Make interest payments, return principal at maturity, meet contractual agreements, maintain the underlying assets/collateral, etc.

Negative Covenants: Force you NOT to do stuff. Eg: do not take additional debt, etc.