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 ✓ UPSC's answer
- (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
Why the answer is (a)
• Statement I is correct: bondholders receive fixed interest and repayment of principal, so their returns are more predictable than those of stockholders, who bear the residual risk of the business.
• Statement II is correct and explains I: bondholders are creditors who have lent money to the company, whereas stockholders are its owners whose dividends depend on profits.
• Statement III is correct and also explains I: in repayment, and especially in insolvency, creditors including bondholders rank ahead of equity holders, who are paid last, if at all.
• Both the legal position (creditor vs owner) and the payment priority make bondholders' risk lower.
• Hence option (a).
Why the other options are wrong
- (b) Both Statement I and Statement II are correct and Statement I explains Statement II
- The direction is reversed: II explains I, not I explains II, and III is also relevant.
- (c) Only one of the Statements II and III is correct and that explains Statement I
- Both II and III are correct and both explain I.
- (d) Neither Statement II nor Statement III is correct
- Both II and III are correct.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2025, held on 25 May 2025. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.