{"id":1761,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1761"},"modified":"2026-03-24T13:59:55","modified_gmt":"2026-03-24T13:59:55","slug":"affirmative-negative-covenants","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/fixed-income\/affirmative-negative-covenants\/","title":{"rendered":"Affirmative and Negative Covenants"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following is an affirmative covenant?\",\n    \"text\": \"Which of the following is an affirmative covenant?\\n\\nA. The issuer will insure at least 75% of operating assets.\\n\\nB. The issuer will not be paying dividends in excess of 25% of EBIT.\\n\\nC. The issuer has a predefinition of both maximum debt-to-equity ratio and minimum times interest earned to 1.0.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nAn affirmative (positive) covenant requires the issuer to take certain actions, such as maintaining insurance on assets.\\n\\nOption B is a negative covenant because it restricts dividend payments.\\n\\nOption C is also a negative covenant because it imposes limits on financial ratios.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"A negative covenant for a senior bondholder is the constraint on which of the following?\",\n    \"text\": \"A negative covenant for a senior bondholder is the constraint on:\\n\\nA. The issuance of a more senior loan.\\n\\nB. Complying with group transfer pricing policies.\\n\\nC. How to spend cash from the proceeds of bond issuance.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nA negative covenant restricts certain actions by the issuer, such as issuing additional debt that would rank higher than existing bonds.\\n\\nOptions B and C are affirmative covenants because they involve administrative or operational requirements rather than restrictions on the issuer\u2019s actions.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Fixed-Income Securities: Defining Elements (2025 Level I CFA\u00ae Exam \u2013 Fixed Income \u2013 Module 1)\",\n  \"description\": \"This video lesson covers the fundamental elements of fixed-income securities, including bond features, indentures, covenants, and cash flow structures. It explains legal, regulatory, and tax considerations, explores contingency provisions, and differentiates bond types, providing essential insights into how these factors impact issuance, trading, and investment decisions in fixed-income markets.\",\n  \"uploadDate\": \"2022-05-19T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/7zXN8w_K6dQ\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/7zXN8w_K6dQ\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/7zXN8w_K6dQ\",\n  \"duration\": \"PT53M26S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/7zXN8w_K6dQ?si=dvR83fAnLklAEhdZ\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Covenants are legally enforceable rules that parties (borrowers and lenders) agree on. The purpose of covenants is to protect bondholders by providing some assurance on what the bond issuer will and won&#8217;t do over the bond&#8217;s life. There are two types of covenants.<\/p>\n<h2><strong>Affirmative (or Positive) Covenant<\/strong><\/h2>\n<p>These covenants require a party to do something, are administrative in nature, and do not result in additional costs. Therefore, they do not materially limit the issuer\u2019s freedom while executing day-to-day business operations. Affirmative covenants essentially require the issuer to adhere to certain terms. These may include:<\/p>\n<ul>\n<li>outlining what the issuer can do with the proceeds from the bond issue;<\/li>\n<li>obligating the issuer to promise to return the principal of a loan at maturity; or<\/li>\n<li>obligating the issuer to comply with laws and regulations, insure assets adequately, or deliver timely audit reports.<\/li>\n<\/ul>\n<h2><strong>Negative Covenants<\/strong><\/h2>\n<p>Negative covenants state what issuers are forbidden from doing (or simply, should not do). These covenants are legally binding on the issuer, are costly, and materially limit business decisions. Examples include:<\/p>\n<ul>\n<li>barring the issuer from taking on additional debt;<\/li>\n<li>imposing a maximum acceptable debt ratio (such as leverage or gearing ratios) or a minimum acceptable interest coverage ratio;<\/li>\n<li>restricting asset disposals, distributions to shareholders, or engagement in (risky) investments; or<\/li>\n<li>explicitly ruling out mergers and acquisitions of any form unless certain conditions are met.<\/li>\n<\/ul>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>Which of the following is an affirmative covenant?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">The issuer will insure at least 75% of operating assets.<\/li>\n<li data-tadv-p=\"keep\">The issuer will not be paying dividends in excess of 25% of EBIT.<\/li>\n<li data-tadv-p=\"keep\">The issuer has a predefinition of both maximum debt-to-equity ratio and minimum times interest earned to 1.0.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Insuring assets adequately is a positive covenant, while options A and C are examples of negative covenants.<\/p>\n<h3><strong>Question 2<\/strong><\/h3>\n<p>A negative covenant for a senior bondholder is the constraint on:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">The issuance of a more senior loan.<\/li>\n<li data-tadv-p=\"keep\">Complying with group transfer pricing policies.<\/li>\n<li data-tadv-p=\"keep\">How to spend cash from the proceeds of bond issuance.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Options B and C are all affirmative covenants. They are administrative in nature and do not limit operations of business.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Covenants are legally enforceable rules that parties (borrowers and lenders) agree on. The purpose of covenants is to protect bondholders by providing some assurance on what the bond issuer will and won&#8217;t do over the bond&#8217;s life. There are two&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[9],"tags":[],"class_list":["post-1761","post","type-post","status-publish","format-standard","hentry","category-fixed-income","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Affirmative &amp; Negative Covenants Explained | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand affirmative and negative covenants, their role in bond agreements, and how they protect lenders and bondholders.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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