Which of the Following Is True Regarding Subordinated Debt

question 1

Multiple Choice

Which of the following is true regarding subordinated debt?

• A) Subordinated debt claims come before the claims of depositors.
• B) Principal payments are not mandatory.
• C) Transaction costs on issuing new debt are lower than when issuing new equity.
• D) Interest payments on subordinated debt are tax-deductible.
• E) New subordinated debt dilutes existing shareholder equity.

---

Definitions:

Diseconomies of Scale

The phenomenon where, as a firm scales up its production, the per unit cost starts to increase, typically due to inefficiencies.

Economies of Scale

Economies of scale occur when a company reduces costs per unit due to an increase in production, typically achieved through operational efficiency and larger volume production.

Constant Returns to Scale

A situation in production where increasing all inputs by a certain factor results in output increasing by the same factor, indicating proportionate scalability.