True of false: Debt is less risky than equity because a debtholder’s claim has priority to an equity holder’s claim.
True
True.
Debt is less risky than equity because a debtholder’s claim has priority to an equity holder’s claim. In other words, if a company is unable to meet its obligations and goes bankrupt, the debtholders will be paid first before the equity holders. This means that in case of liquidation or bankruptcy, the debtholders will receive their payment before the equity holders. Therefore, debt is less risky than equity because it has a greater level of security for the investor.
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