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Asset-Coverage Test

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Asset-coverage test
A bond indenture restriction that permits additional borrowing if the ratio of assets to debt does not fall below a specified minimum.
Asset-Coverage Test
A test determining whether a company is allowed to issue bonds. It is calculated by subtracting a company's current liabilities from its net assets and dividing the quantity by its total debts and/or preferred stock obligations; it may be expressed as dollar amount or as a percentage. Generally, a higher asset-coverage test is desirable, as it indicates the level of debt is low compared to net assets. A significant limitation of the asset-coverage test is the fact that it does not account for liquidity when making the calculation.


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