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Negative covenant

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Definition of Negative covenant

Negative Covenant Image 1

Negative covenant

A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.



Related Terms:

Negative Loan Covenants

Loan covenants designed to limit a corporate borrower's behavior
in favor of the lender.


Bond covenant

A contractual provision in a bond indenture. A positive covenant requires certain actions, and
a negative covenant limits certain actions.


Covenants

Provisions in a bond indenture or preferred stock agreement that require the bond or preferred
stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified
actions (negative covenants).


Financial Covenant

A feature of a debt or credit agreement that is designed to protect the lender or creditor. It is common to characterize covenants as either positive or negative covenants.
A positive covenant might require that the debtor maintain a minimum amount of working capital.
A negative covenant might limit dividend payments that may be made.


Affirmative covenant

A bond covenant that specifies certain actions the firm must take.



Covenants

Promise usually made in a contract whereby a party to the contract promises to do or not to do specified things.


Financial Covenants

A promise made related to financial conditions or events. Often a promise not to allow certain balance sheet items or ratios to fall below an agreed level. Usually found in loan documents, as a protection mechanism.


Negative Covenant Image 2

Loan Covenants

Express stipulations included in loan agreements that are designed to monitor
corporate performance and restrict corporate acts, affording added protection to the lender.


Negative amortization

A loan repayment schedule in which the outstanding principal balance of the loan
increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount
required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.


Negative carry

Related: net financing cost


negative cash flow

The cash flow from the operating activities of a business
can be negative, which means that its cash balance decreased from
its sales and expense activities during the period. When a business is
operating at a loss instead of making a profit, its cash outflows for
expenses very likely may be more than its cash inflow from sales. Even
when a business makes a profit for the period, its cash inflow from sales
could be considerably less than the sales revenue recorded for the
period, thus causing a negative cash flow for the period. Caution: This
term also is used for certain types of investments in which the net cash
flow from all sources and uses is negative. For example, investors in
rental real estate properties often use the term to mean that the cash
inflow from rental income is less than all cash outflows during the
period, including payments on the mortgage loan on the property.


Negative convexity

A bond characteristic such that the price appreciation will be less than the price
depreciation for a large change in yield of a given number of basis points.


Negative duration

A situation in which the price of the MBS moves in the same direction as interest rates.


Negative goodwill

A term used to describe a situation in which a business combination
results in the fair market value of all assets purchased being more than the purchase
price.


Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any
liens that may be granted in the future to any other currently unsecured lenders.


Positive covenant (of a bond)

A bond covenant that specifies certain actions the firm must take. Also called
and affirmative covenant.


Positive Loan Covenants

Loan covenants expressing minimum and maximum financial measures
that must be met by a borrower.


Protective covenant

A part of the indenture or loan agreement that limits certain actions a company takes
during the term of the loan to protect the lender's interests.



protective covenant

Restriction on a firm to protect bondholders.


Restrictive covenants

Provisions that place constraints on the operations of borrowers, such as restrictions on
working capital, fixed assets, future borrowing, and payment of dividend.



 

 

 

 

 

 

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