The Purpose of the Restrictive Debt Covenant That Requires That

question 103

Multiple Choice

The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to

• A) ensure that certain key employees are maintained.
• B) limit the amount of fixed-payment obligations.
• C) ensure a cash shortage does not cause an inability to meet current obligations.
• D) protect the lender by maintaining its position in the priority of claims in the event of liquidation.

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Definitions:

Economic Efficiency

A state where resources are allocated in the most effective way possible, maximizing output without wasting any inputs, ensuring that goods and services are produced at the lowest possible cost and distributed to those who value them most.

Deregulation

The process of removing or reducing government controls and restrictions in an industry to allow for more competition and efficiency.

Pork-Barrel Politics

The allocation of government spending for localized projects secured primarily to bring money to a representative's district, often without proper consideration of the benefits or costs.

Principal-Agent Problem

The principal-agent problem occurs when there is a conflict of interest between a principal (owner or shareholder) and an agent (manager or executive) due to differing goals, with the agent potentially making decisions that benefit themselves at the expense of the principal.