Final answer:
The correct statement is that debt and equities can both be long-term financial instruments. Bonds, representing debt, have fixed interest payments, while equities involve ownership in the company and potential dividends.
Step-by-step explanation:
Among the given statements about the characteristics of debt and equities, the true statement is A) They can both be long-term financial instruments. Bonds and equities are two types of financial instruments that companies can use to raise capital. Debt, often issued in the form of bonds, requires scheduled interest payments but allows the company to maintain control over its operations. In contrast, equities, typically in the form of stock, involve selling ownership stakes in the company and may lead to dividend payments and voting rights for shareholders.
Bondholders are actually not residual claimants; rather, they are creditors who are entitled to interest payments and the return of principal upon maturity of the bond. Equity holders (stockholders) are the residual claimants, as they have a claim on the earnings of the company after all debts have been paid. The income from bonds is generally less variable than that from equities since bonds have fixed interest payments, whereas dividends from equities can fluctuate based on the company's performance. Lastly, bonds do not pay dividends; instead, they typically pay regular interest, which is known as the coupon payment.