Debt capital is less risky than equity capital because a firm is legally obligated to pay interest to bondholders but they are not legally obligated to pay dividends to preferred or common stockholders.

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Debt capital providers, such as bondholders, have a legal claim on a company's assets and are entitled to receive interest payments regardless of the company's financial performance. In contrast, equity capital providers, such as preferred and common stockholders, have no guarantee of receiving dividends and their returns are dependent on the company's profitability and stock performance. Therefore, debt capital is considered less risky because the company is legally obligated to make payments to bondholders, whereas it has more flexibility with paying dividends to shareholders.

Debt Capital Is Less Risky Than Equity Capital Because a Firm