CFA® Level I question of the day
19 October 2026 · Fixed Income
Why does a restriction on paying dividends protect bondholders?
Show the answer and explanation
Answer: B. Because cash paid out to shareholders is cash no longer available to service the debt
Once the money is lent, the cheapest way for shareholders to gain at lenders' expense is to take the cash out.
- A. Because dividends are taxable to the issuer - Dividends are paid from after-tax profit and are generally not deductible, but the issuer's tax position is not what the covenant protects.
- C. Because dividends raise the issuer's cost of equity - They do not, and the cost of equity is a shareholder concern. Lenders care about the cash leaving the business.
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Notes, formulas and a worked question for every learning outcome are on the Fixed Income page, with the whole CFA Level I syllabus alongside.