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Which of the following conditions is/are affirmative covenants?
I. The principal of $500 million will be repaid at a 5% interest.
II. The debt-to-equity ratio of the borrowing company should not fall below 2.5.
III. The borrower is not allowed to distribute profits of the company as dividend as long as the loan is not repaid.- A. All three conditions are affirmative covenants.
- B. Only I is an affirmative covenant.
- C. Only I and II are affirmative covenants.
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The correct answer is B.
An affirmative covenant is a type of promise or contract that requires a party adhere to certain terms. Option I is a positive covenant.
A negative covenant restricts a company from engaging in certain actions or, in other words, a promise not to do something. Option II and III are negative covenants. Financial ratios and examples of what the borrower is not allowed to do are both examples of negative covenants.
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concernedape said:I never get these right…
Keep working hard! No one said it would be easy.
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