Bondholders vs Stockholders
Question
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?
Options
Both Statement II and Statement III are correct and both of them explain Statement I
Both Statement II and Statement III are correct but only one of them explains Statement I
Only one of the Statements II and III is correct and that explains Statement I
Neither Statement II nor Statement III is correct
Explanation
All three statements are correct, and both II and III explain I.
Bondholders face lower risk (Statement I) precisely because they are creditors with a legal right to fixed interest (Statement II), and in the event of liquidation, debt claims are satisfied before equity claims (Statement III).
Answer: (a).
Question details
Year
2025
Paper
GS Paper 1
Question
Q7
Subject
Economy
Sub-topic
Financial Markets & Instruments
Type
Assertion-Reason
Difficulty
Easy
Nature
Static
Source hint
NCERT Economy Cl.11 Ch.8 / Corporate Finance & Capital Structure
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