Why are bonds considered less risky than preferred stock?

Bonds are considered less risky than preferred stock primarily because bond interest payments are mandatory. This means that bondholders are entitled to receive their interest payments regardless of the company's financial performance, as long as the company remains solvent. If a company runs into financial difficulties, it is obligated to pay interest on its bonds before it can distribute any dividends to preferred or common stockholders. This legal requirement enhances the priority of bondholders in the capital structure, making bonds a more secure investment compared to preferred stocks, where dividend payments may be suspended if the company faces financial challenges.

While other options pertain to certain characteristics of bonds and preferred stock, they do not address the core reason for the risk differentiation between the two. For instance, while it's true that bonds may have a lower yield compared to stocks, this does not inherently reflect their risk level. Additionally, preferred stock dividends are not guaranteed in the same way bond interest payments are, which contributes directly to the perception of higher risk associated with preferred stocks. The option about converting bonds into stock pertains to a specific feature rather than a broader risk assessment.