Consider the following statements:As regards returns from an investment in a company, generally, bon

Question

Consider the following statements: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 purpose, bondholders are prioritized over stockholders by a company.Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement I is correct: Bondholders have fixed interest payments and are paid before shareholders, making their investments less risky. Statement II is correct: Bondholders lend money to the company (debt), while stockholders own equity (a share in ownership). Statement III is correct: For repayment purpose, bondholders are prioritized over stockholders by a company. In liquidation or bankruptcy, bondholders are paid before shareholders. Since both II and III are correct, and both explain why bondholders are at lower risk (Statement I), the correct answer is: (a) Both Statement II and Statement III are correct and both of them explain Statement I