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?
Answer & explanation
Answer: (a) Both Statement II and Statement III are correct and both of them explain Statement I
A bondholder has lent money to the company and is owed a fixed return, while a stockholder owns a share of the company and takes whatever is left. Because lenders must be repaid first, bondholders face less risk than owners; both Statements II and III therefore explain Statement I.
- ✓ Statement-I Bond returns are fixed in advance (coupon and redemption amount), while stock returns depend on profits and share prices, so bonds are generally the lower-risk claim on the same company.
- ✓ Statement-II SEBI explains that an equity investor becomes an owner of the company, while a debt investor becomes a lender to it.
- ✓ Statement-III As a lender, the bondholder has a higher claim on the company's assets than a shareholder if the company goes bankrupt, so bondholders are repaid first.
Remember · Bondholders = lenders (fixed return, paid before shareholders); stockholders = owners (voting rights, residual claim, higher risk).
Sources
- SEBI, FAQs on the Corporate Bond market ↗ “When an investor invests money through equity, he becomes an owner in the company issuing such equity shares. … In case of debt, the investor becomes a lender to the company. As a lender, he has higher claim to the assets of the issuer as compared to a shareholder in the event of the company filing for bankruptcy.”
Question and answer: UPSC's official GS Paper I (2025, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·