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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A company's creditors are concerned that management may take on excessive risk after bonds are issued. Which element of the stakeholder management infrastructure most likely gives creditors direct protection against this?

Bond covenants most likely give creditors direct protection. They are contractual restrictions that limit management actions, such as raising more debt or selling key assets, which reduces risk-shifting after issuance. Shareholder meetings and employee ownership primarily serve equity holders and employees, not creditors.

  1. ABond covenantsCorrect
  2. BAnnual shareholder meeting
  3. CEmployee stock ownership

Explanation

Bond covenants are contractual restrictions on borrower actions such as additional debt or asset sales, and they form part of the contractual infrastructure protecting creditors. Shareholder meetings and employee stock ownership primarily serve other stakeholders.

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