If a firm issues debt but writes protective and restrictive covenants into the loan contract, then the firm's debt may be issued at a _____ interest rate compared with otherwise similar debt.
A)significantly higher
B)slightly higher
C)equal
D)lower
E)Either A or B

Question

Quizplus · Accepted Answer

By including protective and restrictive covenants in the loan contract, the lenders are effectively reducing their risk of default. This reduced risk allows the firm to issue debt at a lower interest rate compared to otherwise similar debt that does not have such protections. Therefore, the correct choice is D - lower.

If a Firm Issues Debt but Writes Protective and Restrictive