...are restrictions written into bond and loan contracts either limiting or encouraging the borrower's actions that affect the probability of repayment.

Question

Quizplus · Accepted Answer

Covenants are specific restrictions written into bond and loan contracts that limit or encourage certain actions of the borrower that can affect their ability to repay the loan. They are put in place to protect lenders from any potential risks that borrowers may take. Implicit contracts are agreements that are not explicitly stated, credit rationings refer to the practice of denying loans or credit to certain groups of people, and options refer to the right to buy or sell an asset at a certain price within a specific time frame. None of these deal specifically with restrictions within loan contracts.

Are Restrictions Written into Bond and Loan Contracts Either Limiting