The Purpose of the Restrictive Debt Covenant That Prohibits Borrowers

question 105

Multiple Choice

The purpose of the restrictive debt covenant that prohibits borrowers from entering into certain types of leases is to

• A) limit the amount of fixed-payment obligations.
• B) protect the lender by controlling the risk and marketability of the borrower's security investments alternatives.
• C) ensure a cash shortage does not cause an inability to meet current obligations.
• D) prevent liquidation of assets through large salary increases of key employees.

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Definitions:

Lease Agreement

A contract between a landlord and a tenant specifying the terms under which the tenant may occupy and use a property for a defined period.

Uniform Commercial Code (UCC)

A statutory source of contract law in the United States that is applicable to transactions involving the sale of goods. The UCC was created in 1952 and adopted by all 50 states, the District of Columbia, and the Virgin Islands; it may be modified by each state to reflect the wishes of the state legislature.

Sellers/Lessors

Sellers or lessors are individuals or entities that provide goods or property for sale or lease to buyers or lessees, respectively.

Buyers/Lessees

Individuals or entities that purchase or lease goods and services.