To lessen the risks involved in term loans,a bank will require some restrictive covenants in loan agreements.

Question

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Restrictive covenants are conditions and restrictions in loan agreements that aim to reduce the bank's risk by providing assurance that the borrower will maintain certain financial ratios, adhere to spending limits, and take other specific actions. This helps ensure that the borrower can repay the loan as agreed and reduces the likelihood of default, which is beneficial to the bank.

To Lessen the Risks Involved in Term Loans,a Bank Will