Question 7
Set 1
Contents
QQuestion
OOptions
✓Correct Answer
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.
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.