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Inclusion of bond covenants in the bond contract leads to Question 2 options: higher agency costs...

Inclusion of bond covenants in the bond contract leads to

Question 2 options:

higher agency costs

higher bankruptcy costs

decrease bankruptcy costs

higher interest costs  

None of the above.
business   finance   
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Answer #1

Inclusion of the bond covenants in the bond contract will lead to lower insolvency cost because lower bankruptcy cost will be reflecting that bondholders will be trying to protect their interest always and they will be trying to protect their principal and hence they will be trying to list certain conditions which will be strengthening the overall creditworthiness of the company and it will be helping in avoiding the bankruptcy cost.

Correct answer will be option( C) Decrease bankruptcy cost.

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