Why is the risk for debt investors considered lower than that for equity investors?

The risk for debt investors is considered lower than that for equity investors primarily because debt payments are fixed and take priority over equity payments. This means that in the event of a company's liquidation or financial trouble, debt holders are entitled to receive their payments before any distributions are made to equity investors.

Debt investors, such as bondholders, are contractually promised interest payments and the return of their principal at maturity, which represents a stable and predictable stream of cash flows. This fixed nature of debt obligations reduces the uncertainty regarding repayment, thus lowering the overall risk associated with debt investments compared to equity investments.

In contrast, equity investors might receive dividends, but these are not guaranteed and can fluctuate depending on the company’s performance and decisions made by management. In some scenarios, they might not receive any returns at all, especially during periods of financial strain for the company.