Debt covenants:
A) contain restrictions to control lenders' activities.
B) are designed to protect the interest of managers.
C) reduce the risk to lenders.
D) result in higher interest rates being imposed on the borrowers.

Question

Quizplus · Accepted Answer

Debt covenants are designed to reduce the risk to lenders by imposing restrictions on borrowers to ensure that they will be able to repay the debt. These restrictions may include limits on spending, debt ratios, and other financial measures that are designed to give lenders some assurance that they will be repaid. By reducing the risk to lenders, debt covenants may result in lower interest rates being charged on the debt. They are not designed to control lenders' activities or protect the interests of managers, but rather to mitigate the risk of default and ensure that the borrower can meet its financial obligations.

Debt Covenants