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?

Question

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?

Accepted Answer

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

Explanation: Correct Answer: ✅ Option 1 When investing in a company, bondholders generally face lower risk than stockholders because bonds are debt instruments with fixed claims, while stocks represent ownership and carry higher uncertainty. ✅ Statement I is Correct: Bondholders are generally at lower risk because they receive fixed interest payments and have a higher claim on company assets than stockholders. ✅ Statement II is Correct: Bondholders are lenders (creditors) to the company, whereas stockholders (shareholders) are owners of the company. ✅ Statement III is Correct: In case of liquidation or bankruptcy, bondholders are repaid before stockholders, reducing their investment risk. Why II and III explain I: Since bondholders are creditors and have priority in repayment, their chances of recovering money are higher than those of stockholders. Therefore, they are considered relatively less risky investors. Short Notes: Bonds vs Stocks Bonds are debt instruments; investors act as lenders. Stocks (Shares) represent ownership in a company. Bondholders receive fixed interest payments. Stockholders receive returns through dividends and capital appreciation. In liquidation, creditors and bondholders are paid before shareholders. Bonds generally carry lower risk and lower returns. Stocks generally carry higher risk and higher return potential.

Detailed Explanation:

Short Notes: Bonds vs Stocks

Question 2 of 10 Bonds and Securities

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