As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Bondholders are lenders to a company, whereas stockholders are its owners.
For repayment purposes, bondholders are prioritized over stockholders by a company.
Which one of the following is correct in respect to the above statements?
✅ Correct Answer: A. Both Statement II and Statement III are correct, and both of them explain Statement I.
Explanation:
Statement I is correct: Bondholders take on less risk because they are guaranteed interest payments and repayment of principal, unlike shareholders whose returns depend on profits.
Statement II is correct: Bondholders are creditors; stockholders are owners with equity stakes.
Statement III is correct: In liquidation or repayment, bondholders are paid before stockholders.
Conclusion: Statements II and III justify why bondholders are lower-risk investors than stockholders.
