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. Covenant

    A promise in an indenture, or any other formal debt agreement, ...
  5. Debt-Service Coverage Ratio - DSCR

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

    A metric that shows a company's overall debt situation by netting ...
RELATED FAQS
  1. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  2. What are the differences between debt and equity markets?

    The basic differences between the debt and equity markets include the type of financial interest they represent, the way ... Read Full Answer >>
  3. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>
  4. What do cities do with the funds generated from municipal bonds?

    Funds generated from the sale of municipal bonds may go to provide for unspecified, general government financial needs, or ... Read Full Answer >>
  5. How is the standard error used in trading?

    The standard error is used in trading as an indicator to measure the volatility in price in relation to a linear regression ... Read Full Answer >>
  6. Where can I find information about corporate bond issues?

    Information about new and existing corporate bond issues is published regularly in financial newspapers, such as The Wall ... Read Full Answer >>
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. Bonds & Fixed Income

    What are Floating-Rate Notes?

    A floating-rate note is a debt instrument with an interest rate that “floats,” or varies. They are also called floaters.
  6. Investing

    Five Portfolio Moves For The Second Half

    After a relatively calm few months, market volatility is back. If you are an investor, we help you prepare your portfolio with these five portfolio moves.
  7. Bonds & Fixed Income

    Junk Bonds: Does High Yield Equal Extreme Risk?

    High-yield bonds present a lot of risks but do they outweigh the rewards? Here are some ETFs to consider, with caution.
  8. Economics

    How An Aging World Can Impact Your Portfolio

    It can be easy for investors to lose sight of longer-term, structural developments in favor of more ephemeral trends and fads in the financial markets.
  9. Investing News

    Greece or China: Which is the Bigger Worry?

    A look at Greece, China and other economic concerns, as well as how to invest given the current environment.
  10. Trading Systems & Software

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!