What Is the Main Purpose of Restrictive Covenants

question 140

Multiple Choice

What is the main purpose of restrictive covenants?

• A)They protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
• B)They protect bondholders by expanding the power of managers. Such covenants are spelled out in bond indentures.
• C)They protect bond issuers by constraining the actions of managers. Such covenants are spelled out in bond indentures.
• D)The bond market from adverse price moves due to inefficient investment decisions of managers and investors.

---

Definitions:

Note Payable

A written agreement to pay a certain sum of money, typically with interest, at a future date.

IFRS

A global framework for financial reporting, International Financial Reporting Standards are accounting standards established by the International Accounting Standards Board (IASB).

Financial Liability

An obligation that requires the entity to transfer economic benefits including money, goods, or services to another entity as a result of past transactions or events.

Convertible Debt

A type of bond or other form of debt that can be converted into a specified number of shares of the issuing company's stock at certain times during its life.