Prelims 2025 · Economy · Question 37
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?
Answer
Both Statement II and Statement III are correct and both of them explain Statement I
- Statement I: Generally correct. Bondholders face lower risk than stockholders because debt has a prior claim on income/assets and usually offers fixed returns.
- Statement II: Correct. Bondholders are creditors/lenders, while stockholders are owners/shareholders of the company.
- Statement III: Correct. In repayment/liquidation, bondholders are paid before stockholders due to seniority of debt over equity.
- Option (a): Correct. Both II and III explain I: bondholders are lenders and have repayment priority, so they are relatively less risky than stockholders.
- Option (b): Incorrect. The direction of explanation is wrong; I does not explain II.
- Option (c): Incorrect. Both II and III are correct, not only one.
- Option (d): Incorrect. Neither is false; both II and III are correct.