If the firm issues debt but writes protective and restrictive covenants into the loan contract, then the debt may be issued at a _____ interest rate compared with otherwise similar debt.
A) significantly higher
B) slightly higher
C) equal
D) lower

Question

Quizplus · Accepted Answer

Writing protective and restrictive covenants into the loan contract reduces the risk of default for the lender. Lower risk for the lender results in a lower interest rate for the borrower. Therefore, the debt may be issued at a lower interest rate compared with otherwise similar debt.

If the Firm Issues Debt but Writes Protective and Restrictive