Three Covenant Categories

This question tests your understanding of how debt agreements protect lenders by controlling borrower behavior. You need to know the difference between covenants that require the borrower to do certain things, covenants that restrict what the borrower can do, and covenants tied to financial performance tests. Interviewers ask this because covenants are a core part of leveraged finance and credit analysis, and you are expected to understand how lenders use them to monitor risk, preserve collateral value, and limit actions that could weaken repayment capacity.