The purpose of debt covenants that require the firm to rank any subsequent borrowing below the original loan is to:
A) limit the amount of fixed-interest payments.
B) make sure that any cash restraints do not affect current obligations.
C) protect the lender in their claim over pledged assets in the event of failure.
D) protect the shareholders' claims over assets.

Question

Quizplus · Accepted Answer

The purpose of debt covenants that require the firm to rank any subsequent borrowing below the original loan is to protect the lender in their claim over pledged assets in the event of failure. This ensures that the original lender is repaid first before any other subsequent lenders or creditors, therefore reducing their risk of loss.

The Purpose of Debt Covenants That Require the Firm to Rank