Typically, higher coverage ratios are preferred, but too high a ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.

Question

Quizplus · Accepted Answer

The statement accurately reflects the trade-off between high coverage ratios and under-utilization of fixed-payment obligations, which may lead to lower returns. Therefore, while higher coverage ratios are generally preferred, excessively high ratios indicate inefficiency in managing fixed-payment obligations.

Typically, Higher Coverage Ratios Are Preferred, but Too High a Ratio