Q7 · UPSC Prelims 2025 · Set A · Economy

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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?

A Both Statement II and Statement III are correct and both of them explain Statement I
B Both Statement I and Statement II are correct and Statement I explains Statement II
C Only one of the Statements II and III is correct and that explains Statement I
D Neither Statement II nor Statement III is correct

Correct answer: (a) Both Statement II and Statement III are correct and both of them explain Statement I

Explanation

  1. A

    Both Statement II and Statement III are correct and both of them explain Statement I

    Both II and III are correct and both explain I. Bondholders lend; stockholders own. Bonds rank ahead of equity in repayment. That is why bondholders are generally at lower risk for returns.

  2. B

    Both Statement I and Statement II are correct and Statement I explains Statement II

    I and II with I explaining II. The direction of explanation is backwards, and III is dropped.

  3. C

    Only one of the Statements II and III is correct and that explains Statement I

    Only one of II and III correct. Both are correct.

  4. D

    Neither Statement II nor Statement III is correct

    Neither II nor III. Both corporate-finance lines hold.

Summary. Official Set A key is (a). Bondholders are creditors; stockholders are owners (II). In winding-up, debt is paid before residual equity (III). Fixed coupons and seniority are why bond returns are generally less risky than equity (I). II and III are both true and both explain I. (d) is the trap if you over-think the wording.

Same topic · past papers

UPSC has asked this before

These previous-year questions sit on the same topic. Open one to practise the earlier ask.

  1. 2026 · Q8 · General Studies · 2 marks

    Consider the following statements about the archaeological findings in Harappan towns: I. There is wide occurrence of spindle-whorls in the houses but absence of spinning wheels. II. Weights and measurement scales, complete with graduations have been discovered. III. There are houses built in large part with baked bricks, around relatively spacious courtyards, with their own wells, bathing platforms, and large rooms. Which of the following inferences can be drawn from the above statements? 1. Statement I suggests that spinning was a laborious activity done at home. 2. Statement II suggests the extent of the scientific knowledge that the Harappans possessed. 3. Statement III suggests the emergence of a common property system. Select the answer using the code given below:

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