Set A - UPSC Prelims 2025 Solutions

QQuestion

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?

OOptions

A) Both Statement II and Statement III are correct and both of them explain Statement I

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

✓Correct Answer

A) Both Statement II and Statement III are correct and both of them explain Statement I

DDalvoy Solutions

Statement I: Bondholders are indeed considered to be at relatively lower risk than stockholders regarding returns from company investments.

Statement II: Correct and explains Statement I. Bondholders are lenders to the company (creditors) while stockholders are owners (equity holders). This fundamental difference affects their risk-return profile - lenders have contractual rights to fixed payments while owners bear residual risks.

Statement III: Correct and explains Statement I. For repayment purposes, bondholders have priority over stockholders. In case of bankruptcy or liquidation, debt obligations (bonds) must be paid before any distribution to equity holders, making bondholders' position more secure.

Both the creditor-debtor relationship and payment priority explain why bondholders face lower risk compared to stockholders.

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SUPSC Prelims Strategy and Tips

For corporate finance questions, understand the hierarchy of claims: debt holders (including bondholders) have priority over equity holders in terms of both regular payments and liquidation proceeds.

SUPSC Prelims 2025 Syllabus Analysis

Economics - Corporate finance and investment instruments

AUPSC Prelims 2025 Question Analysis

Easy to Medium difficulty - requires basic understanding of debt vs equity characteristics

Question 7

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