What is a covenant example?

1. Written, solemn, and binding agreement. 2. Binding promise explicitly or implicitly

stipulated in a deed or contract (a loan agreement, for example), by a covenantee (a
lender, for example), which the covenanter (a borrower, for example) must agree to
(otherwise there is no agreement or deal)

A covenant is a contractual requirement that one party to a contract either specifically

complete a task or to refrain from doing something. The term is frequently used in
lending agreements, where a borrower is not allowed to do certain things, such as pay
dividends, while the loan is still unpaid. If a covenant is breached, the lender has the
right to call the associated loan. Covenants are designed to protect the interests of the
lender.

A covenant is positive when it requires a party to take action, and is negative when it
restricts a party from taking action.

Why important? Lenders attach covenants to bond issues and loans as a way to force

the borrower to operate in a financially prudent manner that ensures it will repay
the debt. Issuers, on the other hand, usually negotiate the most flexible covenants they
can so they have the freedom to make decisions and take risks that might ultimately
benefit the shareholders.

In either case, covenants act as a safety mechanism that allows both parties to achieve
its goals

An estimated liability is a debt or obligation of an unknown amount that can be

reasonably estimated. In other words, it's a known liability that management knows
exists, but there is no way of knowing the exact amount of the liability.

2 characteristics
The Liability is Known to exist, precise amount cannot be determined until a later date
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