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?
Explanation:
Statement I: Bondholders are indeed considered lower risk than stockholders because their returns (interest payments) are fixed and they have a prior claim on the company's assets in case of liquidation. This statement is correct. Statement II: This is a fundamental distinction: bondholders lend money to the company and are creditors, while stockholders own a part of the company. This statement is correct. Statement III: In the event of a company's bankruptcy or liquidation, bondholders (creditors) have a higher priority for repayment of their principal and interest compared to stockholders, who are residual claimants. This statement is correct. Both Statement II (defining the relationship) and Statement III (priority in repayment) directly contribute to and explain why bondholders face lower risk compared to stockholders (Statement I).