15. Which of the following in an example of a negative covenant? a. The borrower

Question

15. Which of the following in an example of a negative covenant?

a. The borrower will at all times maintain a ratio of current assets to current liabilities that is greater than 2.0 to 1.0.

b. The borrower will use the proceeds of the loan in accordance with the loan purposes set forth in the loan agreement.

c. The borrower shall prepare financial statements in accordance with GAAP.

d. The borrower agrees that it will not repurchase its stock using the proceeds of this loan, either directly or indirectly.

Explanation / Answer

Answer: d

'Negative Covenant' A bond/Loan covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond /Loan issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders/Loan borrowers. So the answer is:

d. The borrower agrees that it will not repurchase its stock using the proceeds of this loan, either directly or indirectly.

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