IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company
Which feature of a bond issue is designed mainly to protect lenders by restricting the borrower's future actions, such as limits on further borrowing or on dividend payments?
The feature is a restrictive covenant. It is a term in the loan or bond agreement that limits borrower actions, such as additional borrowing or dividend payments, to protect lenders' position. Other features like calls, sinking funds or conversion rights serve different purposes.
- AA call option
- BA sinking fund
- CA restrictive covenantCorrect
- DA conversion right
- A zero coupon
Explanation
Restrictive (negative) covenants limit actions that could harm lenders, such as raising more debt or paying excessive dividends. A call option benefits the issuer, a sinking fund provides for repayment, a conversion right gives equity exposure and a zero coupon concerns the payment pattern.
Did you get it right without looking?
One question tells you little. A timed set on Structure and methods of financing a company shows your real accuracy, how long you take and where you lose marks.
More Structure and methods of financing a company questions
- Kaveri Ltd has a risk-free rate of 6%, an expected market return of 12% and an equity beta of 1.5. It has debt of Rs 30 crore (pre-tax cost …
- Which statement about a bonus (scrip) issue of ordinary shares is correct?
- Sundaram Textiles Ltd has 4,000,000 shares in issue with a market price of Rs 150 each. It makes a 1-for-4 rights issue at Rs 100 per share.…
- Which statement about retained earnings as a source of finance is correct?
- Which of the following is a recognised disadvantage of a company raising a high proportion of its finance as debt rather than equity?
- A company has in issue convertible debentures of Rs 100 face value, each convertible into 5 equity shares in three years' time or redeemable…