Respond to the following statement: Because a firm can lower its interest cost by including more restrictive covenants in its bond indentures, a firm should use the most restrictive set of covenants it can in order to achieve the lowest interest cost. (Hint: the answer involves two different aspects, and the less obvious one has to do with options.)

Multiple choices are:

the interest savings may not be worth the cost

rather than most restrictive, use the set of covenants that minimizes the total contract cost, including opportunity costs

restrictive covenants can be like overlapping options, where the extra covenant does not add its full value but does inflict its full cost

restrictive covenants can eliminate one or more real options a firm might otherwise have

A and B

A and C

A and D

B and C

B and D

C and D

all but A

all but B

all but C

all but D

all are true