Subordination clauses in bond indentures

Question

Quizplus · Accepted Answer

Subordination clauses in bond indentures typically prioritize senior creditors in the event of bankruptcy, giving them a higher claim on the firm's assets than junior creditors. This can limit the amount of additional borrowing the firm can undertake since new creditors may not want to be subordinate to existing ones. Thus, both options A and C are true, making E the correct answer. Option B is incorrect because subordination clauses are not necessarily bad for investors; they may increase the likelihood that a firm can meet its debt obligations and avoid default.

Subordination Clauses in Bond Indentures