Lenders typically place restrictions on a borrower’s activities in an attempt to ensure that it can repay both the interest and the principal on the debt. These restrictions are frequently stated in terms of ratios. For instance, a restriction could be that the debt to equity ratio cannot exceed 1.0. If it does exceed 1.0, the debt covered by the restrictions becomes due immediately. The other commonly used ratio is the current ratio.

Required

Explain why the debt to equity and current ratios might be used as restrictions. How do they protect the lender?