UPSC Previous Year Question | Prelims GS | 2025

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, bond-holders are prioritized over stockholders by a company. Which one of the following is correct in respect of the above statements?

  1. Both Statement II and Statement III are correct and both of them explain Statement I
  2. Both Statement I and Statement II are correct and Statement I explains Statement II
  3. Only one of the Statements II and III is correct and that explains Statement I
  4. Neither Statement II nor Statement III is correct

Answer

Correct Answer

Both Statement II and Statement III are correct and both of them explain Statement I

Explanation

Bondholders are creditors/lenders with a fixed claim that is repaid before equity, whereas stockholders are owners who bear residual risk (Statement II, true). Bondholders are legally prioritized over stockholders at the time of repayment/liquidation (Statement III, true). Both facts together explain why bondholders face relatively lower risk than stockholders (Statement I).

Topics: bonds, economy, stock market