What is true regarding interest payments on bonds compared to dividends?

Interest on bonds is viewed as a contractual obligation for the issuer, which means that bondholders are entitled to receive their interest payments before any dividends are distributed to shareholders. This priority in payment reflects the nature of the financial instruments: bonds are debt securities, whereas dividends are considered a distribution of profit to equity shareholders.

When a company issues bonds, it promises to make regular interest payments to bondholders as part of its debt servicing responsibilities. If a company faces financial difficulties, it must fulfill its interest obligations on bonds to maintain its creditworthiness and avoid default, while dividends can be altered or suspended without legal ramifications. Therefore, interest payments on bonds take precedence over dividends, ensuring that bondholders are compensated before any profits are shared with shareholders.

Other options do not accurately represent the payment hierarchy between bonds and equities. For instance, dividends are not guaranteed and can be adjusted by the company's board, unlike interest payments, which are fixed as per the bond’s terms.