Lesson: Debt Covenants

This lesson delves into the concept of debt covenants and how they play a role in minimizing the risk for lenders. By examining various examples, such as banks lending to companies or individuals, the lesson highlights different types of covenants that can be implemented. These may include limiting additional debt issuance, restricting the use of borrowed funds, requiring the maintenance of specific financial ratios, and controlling dividend payments. The lesson also discusses the consequences of violating debt covenants, such as entering into technical default and the possibility of restructuring debt. Finally, the lesson mentions the auditor's role in ensuring compliance with debt covenants during a compliance engagement.