Question

Which of the following is true of debt?

Group of answer choices

It has a variable rate of return relative to equity.

Debt has an infinite term since most debt is issued in perpetuity.

It represents a prior claim on income and assets relative to equity.

Debt is risk-free since it represents a first claim on income and assets.

Answer 1

Debt financing always represent prior claim on the income and assets relative to equity because they are obligatory in nature and the interest related to debt payments are to be paid first, and In the case of liquidation of the company, they have also a prior claim on the Assets of the company rather than the equity shareholders, because equity shareholder will always have a residual claim.

All the other statements are not true of debt because they are representative of wrong statement.

Correct answer is option ( C).