The purpose of a covenant is:
A)to protect the lender in the event of default by the borrower.
B)to protect the borrower in the event of increasing product market competition.
C)to protect the borrower in the event of default by the lender.
D)to protect the borrower in the event of a deterioration of the credit quality of the lender.

Question

Quizplus · Accepted Answer

A covenant is a contractual obligation imposed on a borrower by a lender to protect the lender's interests. It is designed to minimize the risk of default by the borrower by setting certain conditions or restrictions on the borrower's behavior. Covenants can be financial or non-financial and are often used in loan agreements, bond indentures, and other debt instruments. The purpose of these covenants is to ensure that the borrower will be able to repay the loan and that the lender will be protected in the event of default by the borrower. Therefore, option A is the best choice as it correctly explains the purpose of a covenant.

The Purpose of a Covenant Is