The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):
A) maintenance of security provision.
B) collateral restriction.
C) affirmative indenture.
D) restrictive covenant.

Question

Quizplus · Accepted Answer

This prohibition is an example of a restrictive covenant, which is a clause in a bond agreement that restricts the issuer's actions in order to protect the interests of the bondholders, such as limiting the payment of dividends to ensure the company maintains enough resources to meet its debt obligations.

The Written Agreement Between a Corporation and Its Bondholders Might