Economy2025
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?
Explanation
The correct option is that both Statement II and Statement III are accurate and collectively support Statement I. Statement II notes that bondholders are creditors, which provides them priority in receiving returns in the event of a company's liquidation, establishing their lower risk compared to equity investors. Statement III further emphasizes that, during repayment, bondholders are prioritized over stockholders, reinforcing the idea that bondholders face less risk and, consequently, generally receive more stable, lower returns compared to the higher-risk, potentially higher-return stocks held by stockholders. This hierarchy of claims illustrates fundamental principles of corporate finance relevant for UPSC aspirants.