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Q7 (IAS/2025) Economy › Basic Concepts & National Income › Financial securities types Answer Verified

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?

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

Result

Your answer: — · Correct: A

Explanation

The correct answer is option A because all three statements are accurate and Statements II and III together explain Statement I.

Debt securities (bonds/debentures) represent money borrowed that must be repaid with defined terms, where holders receive interest and principal repayment[1], while equity securities represent ownership held by shareholders in a company[2]. This establishes that bondholders are lenders and stockholders are owners (Statement II is correct).

If the issuer faces bankruptcy, bondholders have priority over shareholders in repayment, with bondholders having[4] priority claim before[3] stockholders on the company's assets (Statement III is correct).

These two facts together explain why bonds are generally safer than equities and[3] are considered lower risk investments compared to stocks[5] (Statement I is correct). The combination of bondholders' status as creditors with fixed claims and their priority in repayment directly accounts for their relatively lower risk position compared to stockholders who bear residual ownership risks.

Sources

[1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 42
[2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 41

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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.

Q. Consider the following statements : Statement I : As regards returns from an investment in a company, generally, bondholders are consider…

At a glance

Origin: Books + Current Affairs Fairness: High fairness Books / CA: 8.3/10 · 1.7/10

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This is a conceptual 'Sitter' from the Financial Markets chapter. It tests the fundamental 'Risk-Return Trade-off' principle found in every standard Economy textbook (Vivek Singh, Singhania, NCERT). The challenge isn't the facts, but the 'Assertion-Reasoning' logic—recognizing that legal priority (Statement III) and ownership status (Statement II) are the *causes* of the risk profile (Statement I).

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1: In corporate finance, are bondholders generally considered to be at lower risk than stockholders with respect to returns from an investment in a company?
Statement 2: In a company's capital structure, are bondholders lenders to the company?
Statement 3: In a company's capital structure, are stockholders owners of the company?
Statement 4: In corporate finance, are bondholders prioritized over stockholders for repayment (for example in insolvency) by a company?
Statement 5: Does the fact that bondholders are lenders to a company explain why bondholders are generally at lower risk than stockholders regarding investment returns?
Statement 6: Does the priority of bondholders over stockholders for repayment explain why bondholders are generally at lower risk than stockholders regarding investment returns?

Statement 1

In corporate finance, are bondholders generally considered to be at lower risk than stockholders with respect to returns from an investment in a company?

Origin: Direct from books Fairness: Straightforward Book-answerable

From standard books

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Features of Debentures > p. 264

Presence: 5/5

“• It is for medium to long-term tenure. • The company is liable to pay the debenture holders a specified amount with interest. • Although debentures form part of a company's capital structure, it is not considered as equity share/equity capital. • Debentures are generally transferable. • The holder does not get any right to vote in the company's general meetings unlike equity shareholders. • The interest paid on debentures is a charge against profits of the company and it reduces O”

Why this source?

Debenture holders are owed a specified amount with interest, creating a fixed payment obligation for the company.
Interest on debentures is treated as a charge against profits, implying priority of the debt claim over residual equity claims.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.6 Corporate Bond Market in India > p. 48

Presence: 4/5

“The existence of a deep and liquid corporate debt/bond market has the capability to make India less vulnerable, especially to volatile capital flows. For, a reasonably well-developed bond market could supplement the banking system in meeting the requirements of the corporate sector for long term capital investment and asset creation. It could provide a stable source of finance; especially when the equity/share market is volatile and resource”

Why this source?

A deep corporate bond market can provide a stable source of finance, especially when the equity/share market is volatile.
Bonds are presented as a tool to supplement banking and reduce vulnerability when equity is subject to volatility.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > IMPORTANT TERMS RELATED TO STOCK MARKET > p. 278

Presence: 3/5

“\bar{\alpha} mostor 500K. \geq • Col1: Insider Trading; Mid Cap – Companies with a market capitalisation of \bar{*}5000 crore to 20,000 crore fall in the bracket of mid cap companies. They are considered to be riskier than investment in large cap stocks but generally have the potential to give higher returns in the 3- to 5-year horizon. Investors are interested in such stocks in the hope that they are good ventures that will turn into large cap. For example, Bata, Apollo Hospitals, TVS Motor, etc”

Why this source?

Equity investments (e.g., mid-cap stocks) are described as riskier and potentially more volatile than larger-cap equity, illustrating equity risk characteristics.
The text contrasts varying risk levels within equities, supporting the view that ownership (equity) carries higher return variability than fixed-income claims.

Statement analysis