Asset-coverage test

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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* Ongoing asset-coverage testing--The cover pool will need to be subject to a monthly asset-coverage test to ensure that the adjusted aggregate loan amount will be equal to or greater than the aggregate principal amount of the outstanding mortgage bonds, plus the 5 percent for overcollateralization.