Which of the following is an example of an appropriate loan covenant?
A) The firm must increase its debt ratio by at least 10 percent.
B) The firm must reduce its total asset turnover by 10 percent.
C) The firm must purchase an insurance policy on a key employee.
D) All of the options are examples of an appropriate loan covenant.

Question

Quizplus · Accepted Answer

Loan covenants are conditions that lenders put on borrowing agreements to protect their investment. Option C, requiring the firm to purchase an insurance policy on a key employee, is an example of a positive covenant designed to mitigate the lender's risk by ensuring that the company can continue operations smoothly even if something happens to a crucial member of the team. Options A and B could potentially harm the financial stability of the firm, making them inappropriate as loan covenants.

Which of the Following Is an Example of an Appropriate