UPSC CSE 2025 · PYQ · Capital Markets / Bonds and Stocks · easy
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✓ Correct
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
Explanation
Statement I is correct: bondholders bear lower risk than stockholders because bonds provide fixed returns and have priority in repayment. Statement II is correct: bondholders are creditors/lenders to the company while stockholders are owners (equity holders), which inherently makes ownership risk higher. Statement III is correct: in case of liquidation or financial distress, bondholders (creditors) are prioritized over stockholders (residual claimants) for repayment. Both Statements II and III together explain why bondholders face lower risk than stockholders (Statement I). Hence, both II and III are correct and both explain Statement I.
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