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.
E)None of the above.

Question

Quizplus · Accepted Answer

A restrictive covenant is a clause in a bond indenture or loan agreement that limits certain actions of the issuer. The prohibition against paying dividends in excess of current earnings is an example of a restrictive covenant because it limits the ability of the corporation to distribute profits to its shareholders beyond what it has earned.

The Written Agreement Between a Corporation and Its Bondholders Might