Incurrence covenants are triggered by taking a specified action. Which option correctly describes this concept?

Incurrence covenants are triggered by taking a specified action. Which option correctly describes this concept?

• A. They require ongoing quarterly compliance
• B. They apply only when taking a specified action
• C. They apply regardless of actions
• D. They are not used in bonds

Answer: (B)

Incurrence covenants are action-triggered restrictions: they only come into play when a borrower takes a specific action, such as issuing new debt, making an acquisition, or selling assets. If that action isn’t taken, the covenant isn’t tested and doesn’t constrain behavior. This is why the description that they apply only when taking a specified action is the best fit. It contrasts with covenants that require ongoing quarterly compliance or are unconditional and always in force, and it’s false to say they aren’t used in bonds, since such covenants are common in debt agreements and bonds to manage risk when certain actions occur.

Incurrence covenants are action-triggered restrictions: they only come into play when a borrower takes a specific action, such as issuing new debt, making an acquisition, or selling assets. If that action isn’t taken, the covenant isn’t tested and doesn’t constrain behavior. This is why the description that they apply only when taking a specified action is the best fit. It contrasts with covenants that require ongoing quarterly compliance or are unconditional and always in force, and it’s false to say they aren’t used in bonds, since such covenants are common in debt agreements and bonds to manage risk when certain actions occur.