The protective covenants contained within a loan agreement
A)impose restrictions on the lender.
B)are designed to protect the borrower's shareholders.
C)increase the borrower's flexibility.
D)tend in increase the bond's interest rate.
E)can increase the value of the borrowing firm.

Question

Quizplus · Accepted Answer

The protective covenants contained within a loan agreement can increase the value of the borrowing firm by reducing the risk of default, thus making the bond more attractive to investors. These covenants typically impose certain restrictions on the borrower, such as limiting the amount of additional debt that can be taken on or requiring the maintenance of certain financial ratios, which can help to ensure the borrower's ability to meet its debt obligations. This increased level of assurance can make the bond more appealing to investors, leading to lower borrowing costs and higher overall value for the borrowing firm.

The Protective Covenants Contained Within a Loan Agreement