Statement I: As regards returns from an investment in a company, generally, bondholders are considered to be…
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?
Both Statement II and Statement III are correct and both of them explain Statement I
Both Statement I and Statement II are correct and Statement I explains Statement II
Only one of the Statements II and III is correct and that explains Statement I
Neither Statement II nor Statement III is correct
Solution
All three statements are correct. The fact that bondholders are creditors (II) and have priority in repayment (III) together explain why their risk is lower than stockholders (I).