Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
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?

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. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 42
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 41
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
53%
got it right
PROVENANCE & STUDY PATTERN
Full view
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
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 2
In a company's capital structure, are bondholders lenders to the 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 entitled to a specified amount plus interest, showing a contractual payment obligation by the company.
  • Debentures are treated as part of the capital structure but explicitly not as equity, implying a creditor (not owner) relationship.
  • Interest on debentures is a charge against profits, a characteristic of debt obligations rather than equity returns.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 45
Presence: 5/5
“2 cr | Bank Loan = Rs. 2 cr Bonds = Rs. 1 cr | Debt • "XYZ Pvt. Ltd.": 7 cr; Col2: 7 cr; Col3: In the above example, investors are investing/putting money in the company in the following two ways: • at a particular/fixed interest rate and gets the debt security• at profit or loss and becomes owner and gets equity security So, against the total assets, the company issues either debt or equity securities to the investors and the same are represented in the company's account book on the liability side.”
Why this source?
  • Investors provide funds either as debt (receive fixed interest) or as equity (share profits/losses), distinguishing debt investors from owners.
  • The company records debt securities (bonds/notes) on the liability side, indicating those investors are creditors/lenders.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > EFFECTS/IMPACT OF INFLATION > p. 70
Presence: 5/5
“• On lender and borrower: On bond holders; Inflation benefits the borrower (debtors), whereas it causes loss to the lender (creditors).: As bond gives a fixed return after maturity, the bond holder tends to lose due to rise in rate of inflation. • On lender and borrower: On fixed income groups; Inflation benefits the borrower (debtors), whereas it causes loss to the lender (creditors)”
Why this source?
  • Discussion of bondholders contrasts borrower (debtor) and lender (creditor) outcomes, linking bondholders to the lender/creditor role.
  • Bonds provide fixed returns after maturity, a defining feature of loan-like claims rather than ownership.
Statement 3
In a company's capital structure, are stockholders owners of the company?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Shares > p. 263
Presence: 5/5
“• The capital of a company is divided into shares. Each share forms a unit of ownership of the company and is offered for sale so as to raise capital for the company. • The shareholders receive dividends (not interest) as return from the company. They also enjoy/suffer capital gains/losses at the time of sale of shares. • Shares can broadly be divided into two categories: • Equity shares \mathbf{1}. • Preference shares \overline{2}”
Why this source?
  • Capital is divided into shares, and each share functions as a unit of ownership in the company.
  • Shareholders receive dividends and gain/lose from changes in share value, reflecting ownership stakes.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
Presence: 5/5
“• Foreign Investment means any investment made by a 'person' resident outside India in 'capital instruments' of an Indian company. Person means foreign individuals, NRIs, companies etc.• 'Capital Instruments' means equity shares, debentures (fully, compulsorily and mandatorily convertible debentures), preference shares (fully, compulsorily and mandatorily convertible preference shares) and share warrants issued by the Indian company. • Equity shares: Equity shares represent ownership of the company and voting rights• Preference shares (fully, compulsorily and mandatorily convertible preference shares): They have preferential rights over dividend and to repayment of the capital in the case of a winding-up of the company.”
Why this source?
  • Equity shares are explicitly described as representing ownership of the company.
  • Equity shares carry voting rights, linking shareholding to control/ownership.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 45
Presence: 4/5
“Now the value of the owners in the company will be Rs. 2 crore representing 100% ownership. And the new owners would like to hold the ownership/share document in proportion to their ownership. So, the ownership document that the initial entrepreneur was holding (whose value has now become Rs. 2 crore) will be divided into two lakh pieces. The entrepreneur will be holding 50% ownership and one lakh shares of Rs. 100 each. And the new one lakh owners will be holding combined 50% ownership with one share each worth Rs. 100. Now, if the company's assets increase either by increase in the valuation of the building or because the company is making profit then the value of each share will increase.”
Why this source?
  • Ownership is represented by an ownership document divided into shares proportional to each owner's stake.
  • Changes in company assets or profits affect share value, underscoring the economic reality of ownership.
Statement 4
In corporate finance, are bondholders prioritized over stockholders for repayment (for example in insolvency) by a company?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 42
Presence: 5/5
“the company on a proportionate basis i.e., the equity holders get voting rights and thus some control of the business. 2. Debt security represents money that is borrowed and must be repaid with terms that define the amount borrowed, interest rate and maturity date. Holders of debt security receive interest and repayment of the principal. The entity (company) that issues the securities is known as the issuer of security. Whenever a person invests (puts money) in a company/ project, then this investment can be done broadly in two ways. • 1. By purchase of equity securities. In this case the investor puts the money in the company and gets a share in the ownership of the company.”
Why this source?
  • Defines debt security as borrowed money that must be repaid under specified terms.
  • Specifies holders of debt receive interest and repayment of principal, implying a contractual claim on company cashflows.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 41
Presence: 5/5
“Securities are financial instruments (receipts/slips) which promises return (payment) in future and which are tradable. For example, suppose somebody deposited Rs. 1 lakh in his account and got an account statement/ pass book. The person who is holding the account statement will receive interest in future but he is not allowed to sell this paper (account statement) in the market. Hence the account statement is not considered as a security in a strict sense. Securities can be broadly categorized into two categories viz. equity and debt. 1. Equity security (stock/ shares) represents ownership held by shareholders (owners) in a company/ corporation.”
Why this source?
  • Contrasts equity as ownership (shareholders) with debt as a financial obligation.
  • By distinguishing equity (ownership) from debt (repayable obligation), it implies equity is not a contractual creditor claim.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 3: Money and Banking - Part II > 3.10 Insolvency and Bankruptcy Code 2016 > p. 139
Presence: 3/5
“Under the previous legal framework, the primary onus to initiate a resolution process lied with the debtor, and creditor may pursue separate actions for recovery, security enforcement and debt restructuring. Procedure: Under the IBC code, a creditor (financial or operational) or the corporate debtor may initiate corporate insolvency resolution process in case a default is committed by corporate debtor worth more than Rs. 1 crore. An application can be made before the National Company Law Tribunal (NCLT) for initiating the resolution process. The creditor needs to give demand notice of 10 days to corporate debtor before approaching the NCLT. If corporate debtor fails to repay dues to the creditor or fails to show any existing dispute or arbitration, then the creditor can approach NCLT.”
Why this source?
  • Describes insolvency process where creditors (financial or operational) can initiate resolution, showing creditors have enforceable remedies.
  • Creditors' ability to approach NCLT to recover dues indicates creditor claims are actionable during insolvency.
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?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 42
Presence: 5/5
“In this case the person does not get any fixed return but receives profit/ dividend based on the performance of the company. This is the form of purchase of equity securities of the company by the investor.• 2. By purchase of debt securities. In this case the investor puts the money in the company at a fix interest rate for a specific period of time and receives interest (regularly) and principal back at the end of maturity period. This is the form of purchase of debt securities of the company by the investor. To understand securities in a better way let us take an example of a newly registered company "XYZ Private Limited".”
Why this source?
  • Direct contrast between equity (returns tied to company performance) and debt (fixed interest and principal).
  • Shows debt investors receive predetermined payments while equity holders face variable dividends/profits.
  • Implies bondholders' returns are less dependent on firm performance, reducing variability of outcomes versus stockholders.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > 4. Special Purpose Vehicles (SPV) > p. 408
Presence: 4/5
“Like a company, an SPV must have promoter(s) or sponsor(s). Usually, a sponsoring corporation hives off assets or activities from the rest of the company into an SPV. This isolation of assets is important for providing comfort to investors. The assets or activities are distanced from the parent company; hence the performance of the new entity (SPV) will not be affected by the ups and downs of the originating entity. The SPV will be subject to fewer risks and thus provide greater comfort to the lenders.”
Why this source?
  • Explains that isolating assets (SPV) reduces risk exposure and provides comfort to lenders.
  • States that such isolation makes the SPV subject to fewer risks, thereby lowering lenders' risk relative to other claimants.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Credit Rating Agencies > p. 282
Presence: 3/5
“A Credit Rating Agency (CRA) analyses and evaluates an individual's or a company's financial position and creditworthiness in order to find the credit risk associated with the entity or individual. Credit rating helps in better decision-making of the lenders and investors. CRA ratings are very important for issue of bonds, debentures, commercial papers, government debt, etc. A good rating helps in securing lower interest rate as the underlying risk is assumed to be low. The ratings are changed continually, depending on the changing financial position and prospects of the company or government. For example, rise in fiscal deficit would lead to lowering or downgrading in ratings.”
Why this source?
  • Describes how credit rating assesses borrowers' creditworthiness and thereby quantifies lender risk.
  • Notes that better ratings secure lower interest because underlying credit risk is low, showing debt risk is identified and priced.
Statement 6
Does the priority of bondholders over stockholders for repayment explain why bondholders are generally at lower risk than stockholders regarding investment returns?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"Bonds are generally safer than equities. If the issuer faces bankruptcy, bondholders have priority over shareholders in repayment."
Why this source?
  • Explicitly states bondholders have priority in bankruptcy, which reduces recovery risk relative to shareholders.
  • Directly links this priority to the claim that bonds are generally safer than equities.
Web source
Presence: 5/5
"If a corporation goes bankrupt, bondholders have priority claim, before stockholders, on the company's assets. ... a bond buyer generally knows the upper limit to expect on such an investment, especially if it is held to maturity."
Why this source?
  • Specifies bondholders have a priority claim on assets before stockholders in bankruptcy, supporting the repayment-priority mechanism.
  • Notes that bonds have a known upper limit if held to maturity, implying more predictable (and typically lower-risk) returns compared with stocks' unlimited upside.
Web source
Presence: 4/5
"Most bond investments, however, seek to provide regular income and capital preservation. As such, they are generally considered to be a lower risk investment when compared with stocks."
Why this source?
  • States bonds aim to provide regular income and capital preservation—characteristics associated with lower investment risk.
  • Concludes bonds are generally considered to be lower risk investments compared with stocks, consistent with repayment priority reducing bondholder risk.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Debentures > p. 263
Strength: 5/5
“These are the debt instruments with a fixed rate of interest issued by a company and are generally unsecured. It can be for medium or long term and is fully repayable on the maturity date. Many investors prefer debentures because it offers higher rate of interest than fixed deposits (FDs). Interest rates also depend upon the credit rating given by the Credit Rating Agencies (CRAs) such as CARE, ICRA, etc. A lower rated debenture will carry a higher rate of interest because the risk involved is considered high.”
Why relevant

Defines debentures as debt instruments with fixed interest and notes that credit rating affects interest because risk to debt-holders varies.

How to extend

A student can combine this with the basic legal fact that debt typically ranks ahead of equity in bankruptcy to infer that fixed claims + seniority imply lower expected loss relative to equity.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Zero Coupon Bond > p. 264
Strength: 4/5
“A regular bond (coupon bond) pays interest to bondholders over the life of the bond and repays the principal at the time of maturity. But a zero-coupon bond does not pay interest. The face value of the bond is received by the bondholders after it reaches maturity.”
Why relevant

Explains zero-coupon bonds repay face value at maturity rather than periodic interest — emphasises the contractual, time-fixed nature of bond repayment.

How to extend

Use the idea of fixed contractual repayment timing together with the creditor-priority principle to judge that bondholders' returns are more certain than equity's residual claims.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.31 Previous Years Questions > p. 123
Strength: 4/5
“Devaluation of domestic currency decreases the currency risk associated with ECBs. Which of the statements given above are correct? • (a) 1 and 2 only• (b) 2 and 3 only• (c) 1 and 3 only• (d) 1, 2 and 3• 52. With reference to Convertible Bonds, consider the following statements: [2022] 1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest. 2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices. Which of the statements given above is/are correct? • (a) 1 only• (b) 2 only• (c) Both 1 and 2• (d) Neither 1 nor 2”
Why relevant

Notes convertible bonds pay lower interest because they include an option to convert to equity — showing a trade-off between bond-like security and equity upside.

How to extend

From this example, a student can infer that pure debt (without conversion) offers steadier returns and less upside but also generally lower risk compared with equity-linked instruments.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > The Speculative Motive > p. 46
Strength: 4/5
“Such a loss occurring from a falling bond price is called a capital loss to the bond holder. Under such circumstances, you will try to sell your bond and hold money instead. Thus speculations regarding future movements in interest rate and bond prices give rise to the speculative demand for money. When the interest rate is very high everyone expects it to fall in future and hence anticipates capital gains from bond-holding. Hence people convert their money into bonds. Thus, speculative demand for money is low. When interest rate comes down, more and more people expect it to rise in the future and anticipate capital loss.”
Why relevant

Describes capital loss to bondholders from falling bond prices when interest rates change — identifying market (interest rate) risk for bonds separate from credit/priority issues.

How to extend

Combine this market-risk rule with creditor priority to see that bonds have lower credit/claim risk but still face price/interest-rate risk, so overall risk comparison with equity depends on both.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > EFFECTS/IMPACT OF INFLATION > p. 70
Strength: 3/5
“• On lender and borrower: On bond holders; Inflation benefits the borrower (debtors), whereas it causes loss to the lender (creditors).: As bond gives a fixed return after maturity, the bond holder tends to lose due to rise in rate of inflation. • On lender and borrower: On fixed income groups; Inflation benefits the borrower (debtors), whereas it causes loss to the lender (creditors)”
Why relevant

Says inflation causes loss to bondholders because bonds give fixed returns, showing bonds are exposed to real-value risk.

How to extend

A student can weigh this inflation/real-return risk against the residual-claim risk of equity to assess why bondholder priority reduces some risks but does not eliminate others.

Pattern takeaway: UPSC is reviving the 'Assertion-Reasoning' style (Does X explain Y?). You cannot just know facts in isolation; you must understand the *causal link* between an instrument's legal structure (Lender vs Owner) and its economic behavior (Risk vs Return).
How you should have studied
  1. [THE VERDICT]: Sitter. Direct concept from standard texts like Vivek Singh (Ch: Money & Banking) or Nitin Singhania (Ch: Financial Market).
  2. [THE CONCEPTUAL TRIGGER]: Capital Markets > Instruments > The structural difference between Debt (Bonds) and Equity (Shares).
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Risk Hierarchy': G-Secs (Risk Free) < Corporate Bonds < Preference Shares < Equity Shares. Also, study 'Hybrid Instruments': Convertible Bonds (lower interest due to equity option), AT-1 Bonds (perpetual, write-down risk), and Zero-Coupon Bonds (issued at discount).
  4. [THE STRATEGIC METACOGNITION]: Move beyond definitions. Ask 'Why?'. Why is equity riskier? Because it is a 'Residual Claim' (paid last). Why are bonds safer? Because they are a 'Contractual Obligation' (paid first). The exam is testing your grasp of this causal mechanism.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Debentures as fixed-interest debt instruments
💡 The insight

Debentures impose specified interest payments and repayment obligations on a company, distinguishing them from equity ownership.

High-yield for UPSC: explains fundamental difference between debt and equity, informs answers on capital structure and investor risk preferences, and helps tackle questions on corporate financing choices and investor protection.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Features of Debentures > p. 264
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Debentures > p. 263
🔗 Anchor: "In corporate finance, are bondholders generally considered to be at lower risk t..."
📌 Adjacent topic to master
S1
👉 Priority of claims (interest as a charge against profits)
💡 The insight

Interest on debt is a charge against profits, giving debt holders a prior financial claim relative to shareholders.

Essential for questions on creditor rights, insolvency outcomes and settlement order in distress; links to bankruptcy law reforms and investor protection discussions in finance governance.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Features of Debentures > p. 264
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.6 Corporate Bond Market in India > p. 49
🔗 Anchor: "In corporate finance, are bondholders generally considered to be at lower risk t..."
📌 Adjacent topic to master
S1
👉 Bond market stability versus equity volatility
💡 The insight

A developed corporate bond market provides stable long-term finance and can offset volatility in the equity/share market.

Valuable for macro-financial and policy questions: explains why policymakers promote bond market development, ties into financial stability, capital flows, and choices between debt and equity financing.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.6 Corporate Bond Market in India > p. 48
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.6 Corporate Bond Market in India > p. 49
🔗 Anchor: "In corporate finance, are bondholders generally considered to be at lower risk t..."
📌 Adjacent topic to master
S2
👉 Debt vs Equity in Capital Structure
💡 The insight

Companies raise funds either as debt (fixed interest payments) or as equity (ownership sharing), making debt investors lenders rather than owners.

High-yield concept for corporate finance and economics questions; helps distinguish investor rights, balance-sheet presentation, and policy implications of financing choices. Mastery enables answering questions on capital structure, investor claims, and fiscal/monetary impacts on finance.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 45
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Features of Debentures > p. 264
🔗 Anchor: "In a company's capital structure, are bondholders lenders to the company?"
📌 Adjacent topic to master
S2
👉 Debentures/Bonds as Debt Instruments
💡 The insight

Debentures/bonds impose a contractual obligation on the company to pay specified amounts with interest and are not classified as equity.

Essential for understanding creditor protections, fixed-income instruments, and the difference between ownership and lending. Useful across banking, corporate law, and public finance questions about obligations and investor treatment.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Features of Debentures > p. 264
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > EFFECTS/IMPACT OF INFLATION > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 16: Terminology > 16 Terminology > p. 455
🔗 Anchor: "In a company's capital structure, are bondholders lenders to the company?"
📌 Adjacent topic to master
S2
👉 Creditor–Debtor Outcomes (Inflation & Restructuring)
💡 The insight

Inflation and restructuring affect lenders and borrowers differently: inflation tends to harm fixed-income holders, and restructuring negotiations involve lender rights.

Important for macro-financial and banking policy topics—explains distributional effects of inflation, bankruptcy implications, and why creditors act in restructuring. Helps answer questions on financial stability and debt relief mechanisms.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > EFFECTS/IMPACT OF INFLATION > p. 70
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 16: Terminology > 16 Terminology > p. 455
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > Strategic Debt Restructuring (SDR) - 2015 > p. 229
🔗 Anchor: "In a company's capital structure, are bondholders lenders to the company?"
📌 Adjacent topic to master
S3
👉 Shares as units of ownership
💡 The insight

Shares are the basic units through which ownership in a company is represented.

Foundational for corporate finance and business governance questions; explains how capital is raised and how ownership is segmented. Mastering this clarifies topics like shareholder rights, dividends, and capital structure comparisons.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Shares > p. 263
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.4 Securities > p. 45
🔗 Anchor: "In a company's capital structure, are stockholders owners of the company?"
🌑 The Hidden Trap

The 'AT-1 Bond' (Additional Tier-1). While bonds are generally safer, AT-1 bonds are an exception often tested. They are unsecured, perpetual, and can be written off completely if the bank's capital falls below a threshold (e.g., Yes Bank crisis), making them riskier than normal corporate debt.

⚡ Elimination Cheat Code

Apply the 'Risk-Return Trade-off' heuristic. In finance, if you have 'Ownership' (unlimited upside potential), you must carry 'Higher Risk'. If you are a 'Lender' (capped upside/fixed interest), you must have 'Lower Risk'. Since Statement II defines the roles (Owner vs Lender), it logically *must* explain the risk profile in Statement I.

🔗 Mains Connection

Mains GS-3 (Investment Models & IBC): This hierarchy directly links to the 'Waterfall Mechanism' under the Insolvency and Bankruptcy Code (IBC). In liquidation, the order is: Insolvency costs > Secured Creditors/Workmen > Unsecured Creditors > Government Dues > Preference Shareholders > Equity Shareholders.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2023 · Q21 Relevance score: 1.85

Consider the following statements : Statement-I : Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable. Statement-II : InvITs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'. Which one of the following is correct in respect of the above statements?

IAS · 2024 · Q51 Relevance score: 0.97

Consider the following statements : Statement-I : If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment. Statement-II : The USA Government debt is not backed by any hard assets, but only by the faith of the Government. Which one of the following is correct in respect of the above statements ?

IAS · 2024 · Q52 Relevance score: 0.88

Consider the following statements : Statement-I : Syndicated lending spreads the risk of borrower default across multiple lenders. Statement-II : The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. Which one of the following is correct in respect of the above statements ?

IAS · 2023 · Q22 Relevance score: 0.87

Consider the following statements : Statement-I : In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-II : Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means. Which one of the following is correct in respect of the above statements?