Question

If a firm issues debt with no protective covenants in the indenture then the firm's debt will probably be issued at _____ similar debt with protective covenants.
a. a higher interest rate than
b. a lower interest rate than
c. an interest rate equal to that of
d. a slightly higher interest rate than

Answer 1

Answer: b. a lower interest rate than

Explanation:

A protective convenant is also referred to as a restrictive covenant and it is referred to as an agreement whereby a particular company is restricted from doing certain things while a contract is still ongoing.

In this case, when a firm issues debt with no protective covenants in the indenture then the firm's debt will probably be issued at lower interest than similar debt with protective covenants. The reason for this is that the lender is protected when there is a convenant which ultimately lower the cost of debt.