If a ﬁrm issues debt but writes protective and restrictive covenants into the loan contract, then the ﬁrm's debt may be issued at a _____ interest rate compared with otherwise similar debt.
A)signiﬁcantly higher
B)slightly higher
C)equal
D)lower
E)None of the above.

Question

Quizplus · Accepted Answer

Protective and restrictive covenants are designed to reduce the risk to lenders by limiting certain activities of the borrower that could undermine its ability to repay the debt. This reduced risk often allows the firm to issue the debt at a lower interest rate compared to similar debt without such covenants, as lenders are more assured of the safety of their investment.

If a ﬁRm Issues Debt but Writes Protective and Restrictive