Assume a firm issues only three capital claims: zero-coupon senior debt with face value of $300 million; zero-coupon junior debt with face value of $500 million; and $200 million in equity. What is the credit enhancement provided to the senior debt?
A. $200 million
B. $300 million
C. $500 million
D. $700 million
Answer:D
Subordination is credit enhancement. In this case, equity and junior debt are subordinate to senior debt and absorb the first $700 million in losses.