Which statement best describes the difference in cash flows between fixed-income and equity instruments?

• A. Fixed income provides fixed or predictable coupons and principal; equity offers residual claims with variable dividends and price appreciation.
• B. Fixed income promises higher long-term growth; equity offers guaranteed coupon payments.
• C. Equity has fixed coupon payments; fixed income has nondeterministic dividends.
• D. Fixed income yields are always higher than equity yields.

Answer: (A)

The main idea here is how cash flows differ between fixed-income and equity instruments. Fixed-income securities deliver contractual, predictable cash flows: periodic interest payments and the return of principal at maturity. These payments are specified in the contract and occur on a defined schedule, making them relatively stable and foreseeable. Equity instruments, on the other hand, give owners residual claims on the company’s assets and earnings. Dividends (if any) are not guaranteed and can vary or be suspended, and any cash flow from price appreciation depends on future market performance and is not contractually promised.

So the statement that best describes the difference is that fixed income provides fixed or predictable coupons and principal, while equity offers residual claims with variable dividends and price appreciation. The other options conflict with how fixed-income cash flows are contractual and how equity cash flows are uncertain and not guaranteed.