Reading 60: Features of Debt Securities LOSa习题精选 2010, face, following, positive, describe

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Session 15: Fixed Income: Basic Concepts
Reading 60: Features of Debt Securities

LOS a: Explain the purposes of a bond's indenture and describe affirmative and negative covenants.

 

Which of the following is an example of a positive covenant? The company:

A) must not use the same collateral to back more than one debt obligation.

B) must maintain a times interest earned ratio of at least two times.

C) may not sell fixed assets that have been pledged as collateral for the bonds.

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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.

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Which of the following is NOT a negative bond covenant?

A) Current ratio of at least 2.25.

B) Credit rating must be investment grade.

C) Restriction on asset sales.

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Current ratio covenants are positive (borrower promises to perform) versus the others listed (prohibitions on the borrower).

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Which of the following contains the overall rights of the bondholders?

A) Indenture.

B) Covenant.

C) Rights offering.

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Covenants are part of the indenture. A rights offering describes an equity offering—not fixed income.

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Which of the following bond covenants is considered negative?

A) Payment of taxes.

B) Maintenance of collateral.

C) No additional debt.

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Negative covenants set forth limitations and restrictions, whereas positive (affirmative) covenants set forth activities that the borrower promises to do.