[UPSC Prelims PYQ 2025] Bondholders vs Stockholders: priority and risk

Consider the following statements:

1. Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
2. Statement II: Bondholders are lenders to a company, whereas stockholders are its owners.
3. Statement III: For repayment purpose, bondholders are prioritised 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

Explanation

• Bondholders are lenders to a company and receive fixed returns, while stockholders are owners whose returns depend on the company’s performance. In case of repayment or liquidation, bondholders are given priority over stockholders. Therefore, bondholders are generally considered to be at lower risk than stockholders.

Answer: (a) Both Statement II and Statement III are correct and both of them explain Statement I