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 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
Explanation
Option (a) is correct because Statement I (lower risk for bondholders) is a direct consequence of both their legal status as creditors (Statement II) and their preferential claim on assets during liquidation (Statement III). Option (b) is incorrect because Statement I is the result, not the cause, of the relationship described in Statement II. The core concept tested is the hierarchy of claims in corporate finance and the fundamental distinction between debt and equity instruments.
Financial MarketsEquity vs DebtBondholdersStockholdersInvestment riskLendersOwnersRepayment priorityLiquidation