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LOS a: Explain the purposes of a bond's indenture, and describe affirmative and negative covenants. ffice ffice" />
Q1. Which of the following is an example of a positive covenant? The company:
A) must maintain a times interest earned ratio of at least two times.
B) must not use the same collateral to back more than one debt obligation.
C) may not sell fixed assets that have been pledged as collateral for the bonds.
Correct answer is A)
Positive covenants specify what the company must do, negative covenants specify what they must not do. Both of the alternatives are examples of negative covenants.
Q2. Which of the following is NOT a negative bond covenant?
A) Credit rating must be investment grade.
B) Restriction on asset sales.
C) Current ratio of at least 2.25.
Correct answer is
Current ratio covenants are positive (borrower promises to perform) versus the others listed (prohibitions on the borrower).
Q3. Which of the following contains the overall rights of the bondholders?
A) Covenant.
B) Indenture.
C) Rights offering.
Correct answer is B)
Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.
Q4. Which of the following bond covenants is considered negative?
A) Payment of taxes.
B) Maintenance of collateral.
C) No additional debt.
Correct answer is C)
Negative covenants set forth limitations and restrictions, whereas positive (affirmative) covenants set forth activities that the borrower promises to do.
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发表于 2009-3-2 14:54
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