Debt Limitation

AAA

DEFINITION of 'Debt Limitation'

A bond covenant that limits or restricts any additional debt that may be incurred by the issuer. Debt limitations look to protect the current lenders by maintaining the firm's degree of leverage.

INVESTOPEDIA EXPLAINS 'Debt Limitation'

A debt limitation may take a variety of forms, depending on the circumstances of the debt issue. For financially sound firms, lenders may only want to maintain the current levels of leverage and implement a covenant relating to the debt-service coverage ratio. This would allow the firm to borrow more funds when it increases its net income.

If the firm appears risky, lenders may not want it to incur additional debt. The covenant may specify a maximum level of debt, despite any growth in operations. In more extreme cases, the lenders may demand that no additional debt be incurred until their bonds are repaid.

RELATED TERMS
  1. EBITDA To Fixed Charges

    A ratio used to measure a company's ability to incur additional ...
  2. Negative Covenant

    A bond covenant preventing certain activities, unless agreed ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Debt-Service Coverage Ratio - DSCR

    In corporate finance, it is the amount of cash flow available ...
  5. Net Debt

    A metric that shows a company's overall debt situation by netting ...
  6. Covenant

    A promise in an indenture, or any other formal debt agreement, ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  2. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  3. Credit & Loans

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  4. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  5. Economics

    What Would Happen If Interest Rates Rise?

    This time around, while U.S. long-term yields have rebounded from their January lows, rates have generally been lower than where they ended 2014.
  6. Investing

    Strategies To Position Your Bond Portfolio

    Fixed income investors may not be able to see them all right now, but important trends are stirring on the investment horizon.
  7. Savings

    How To Make Money With Airbnb: Risks & Rewards

    Airbnb lets you turn your home or spare room into extra cash. Here's how to make money and protect yourself from the risks.
  8. Mutual Funds & ETFs

    Consider This High-Yield ETF's Risks and Rewards

    Finding quality high-yield opportunities isn’t easy, but the YieldShares High Income ETF (YYY) has potential.
  9. Investing

    What are Fixed-Income Securities?

    For a fixed-income security, the periodic return on the investment is the same throughout the life of the security. Principal is returned at the time of maturity. The payment can be in the form ...
  10. Mutual Funds & ETFs

    Top Emerging Markets Dividend ETFs

    These dividend ETFs offer similar — yet different — ways to play emerging markets.

You May Also Like

Hot Definitions
  1. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  2. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  3. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  4. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  5. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
  6. Irrevocable Trust

    A trust that can't be modified or terminated without the permission of the beneficiary. The grantor, having transferred assets ...
Trading Center