Reference no: EM132740717

These are examples of real covenants So long as any Bond remains outstanding (as defined in the Trust Deed), the Issuer:

(a) shall ensure that on 30 September 2015 (the 'Initial Calculation Date') and each subsequent date which is three months following the Initial Calculation Date or such subsequent date (each a 'Calculation Date') being 30 September, 31 December, 31 March, and 30 June of each year:

(i) the ratio of Net Interest Bearing Debt to Total Assets does not exceed 0.65 (save that the Issuer shall not be in breach of this Condition 4(a)(i) if, on no more than two consecutive Calculation Dates, the ratio of Net Interest Bearing Debt to Total Assets is greater than 0.65 but does not exceed 0.70);

(ii) the ratio of Net Secures Debt to Total Assets does not exceed 0.55 (save that, for the Initial Calculation Date and each Calculation Date up to, and including the Calculation Date falling on 30 June 2016, the Issuer shall not be in breach of this Condition 4(a)(ii) if the ratio of Net Secured Debt to Total Assets does not exceed 0.60); and

(iii) the ratio of Adjusted Profit Before Taxes of Total Interest Expenses exceed 1.40;

Problem 1. Which of the following statements is FALSE about covenant (i)

a) It reduces risk-shifting incentives.

b) It reduces investment on perks

c) It reduces the default probability

d) It relaxes debt overhang problems

Problem 2. Which of the following statements is FALSE about covenant (iii) if corporate taxes are the only deviation from PCM.

a) It forces growth firms to have a lower debt-to-equity ratio.

b) It precludes to choose the optimal level of debt.

c) It reduces firm value.

d) It ensures an excessive interest tax shield.