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UPSC Prelims 2025 GS Paper 1, question 7

Topic: Economy

Q7

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?

  1. (a) Both Statement-II and Statement-III are correct and both of them explain Statement-ICorrect answer
  2. (b) Both Statement-I and Statement-II are correct and Statement-I explains Statement-II
  3. (c) Only one of the Statements II and III is correct and that explains Statement-I
  4. (d) Neither Statement-II nor Statement-III is correct

Solution.

Answer: (a) Both Statement-II and Statement-III are correct and both of them explain Statement-I

  1. Statement-I is correct: bondholders face lower investment risk than equity stockholders because bond interest is contractually fixed and less volatile than residual equity returns.
  2. Statement-II is correct and explains Statement-I: bondholders are creditors (lenders) to the company entitled to contractual interest, whereas stockholders are residual owners who bear business risk.
  3. Statement-III is correct and explains Statement-I: in the event of liquidation or repayment, debt holders (bondholders) have legal priority over equity stockholders.