Final answer:
Affirmative debt covenants require borrowers to take certain actions, while negative debt covenants restrict them from certain activities. Examples include maintaining financial ratios (affirmative) and restrictions on additional borrowing (negative).
Step-by-step explanation:
The difference between affirmative and negative debt covenants lies in what they stipulate a borrower must do or avoid doing. Affirmative covenants are rules that the borrower is required to follow, whereas negative covenants restrict certain actions by the borrower.
- Examples of affirmative debt covenants might include the requirement to maintain certain financial ratios or to insure assets.
- Examples of negative debt covenants could include restrictions on additional borrowing or a prohibition on selling key assets without lender approval.
Affirmative covenants are designed to ensure the ongoing operation and financial health of the borrower, whereas negative covenants protect the lender by preventing actions that could jeopardize the borrower's ability to repay the loan.