A debt covenant
A)serves to give assurance to a creditor that the debtor will have the ability to pay interest and principal at maturity.
B)serves to give assurance to the debtor that the interest rate is reasonable.
C)allows the creditor to become an owner of the company if the covenant is violated.
D)allows the debtor to forego any interest on the debt.

Question

Quizplus · Accepted Answer

A debt covenant is a legally binding agreement between a lender and a borrower that outlines certain terms and conditions of the loan. The purpose of a debt covenant is to give assurance to the creditor that the debtor will have the ability to pay interest and principal at maturity. This helps to minimize the risk to the creditor by ensuring that the borrower has the financial capacity to meet their obligations under the loan.

A Debt Covenant