Bank covenants: construction and analysis given banks are risk-neutral

Abstract

The main purpose of the master's thesis is to describe the optimal contract or patterns that could lead to an optimal relationship between the bank and the company, taking into account the risk-neutral bank and incomplete contracts. For this purpose, the model was created which takes into account these conditions. According to the recommendation of the model, the higher the level of the covenant, the more income is guaranteed for the bank; however, when deciding on the level of the covenant, the bank also has to take into account the potential areas of inefficiency for the bank and the company. Relevant proposals for the bank on how to put into practice the findings relating to the solution of this model are made.