Q. Consider the following statements :
Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Statement II : Bondholders are lenders to a company whereas stockholders are its owners.
Statement III : For repayment purpose, bondholders are prioritized over stockholders by a company.
Which one of the following is correct in respect of the above statements?
(a) Both Statement II and Statement III are correct and both of them explain Statement I
(b) Both Statement I and Statement II are correct and Statement I explains Statement II
(c) Only one of the Statements II and III is correct and that explains Statement I
(d) Neither Statement II nor Statement III is correct
Correct Answer: (a) Both Statement II and Statement III are correct and both of them explain Statement I.
UPSC Prelims 2025 GS Paper's Solution
Explanation :
Statement I asserts that bondholders bear lower risk than stockholders in respect of returns. – This is true because bondholders receive fixed interest payments and have a contractual claim on the company’s assets, whereas stockholders’ dividends are variable and depend on the company’s profitability.
Statement II states that bondholders are lenders to a company, whereas stockholders are its owners. – This is correct. By purchasing bonds, an investor extends credit to the issuer. In contrast, purchasing shares confers an ownership stake in the firm.
Statement III claims that for repayment purposes, bondholders are prioritized over stockholders. – This is also correct. In the event of liquidation or bankruptcy, secured and unsecured creditors (including bondholders) are paid before any residual distribution to equity holders.
Since both Statement II and Statement III are true and together explain why bondholders face relatively lower risk (as stated in Statement I), option (a) is the correct choice.
