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

The correct answer is (a) Both Statement II and Statement III are correct and both of them explain Statement I.

Here is the step-by-step reasoning:

Analyze Statement I: “As regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.”
- This statement is correct. Risk, in this context, refers to the likelihood of losing your investment or not receiving a return. Bondholders receive fixed interest payments, while stockholders’ returns depend on profits (dividends) and stock price appreciation, neither of which is guaranteed.
Analyze Statement II: “Bondholders are lenders to a company whereas stockholders are its owners.”
- This statement is correct. This is the fundamental definition of the two asset types. Buying a bond is lending money (debt) to the company. Buying a stock is buying a piece of the company (equity/ownership).
Analyze Statement III: “For repayment purpose, bondholders are prioritized over stockholders by a company.”
- This statement is correct. This priority applies in two ways:
  - In normal operations: A company is legally obligated to pay interest to its bondholders before it can choose to pay any dividends to its stockholders.
  - In bankruptcy: If a company is liquidated, bondholders (as lenders/creditors) have a higher claim on the company’s assets and must be paid back first. Stockholders (as owners) are last in line and often get nothing.
Analyze the Relationship:
- The question is why bondholders are at lower risk (Statement I).
- The reason is because they are lenders, not owners (Statement II), and because the law gives lenders priority for repayment over owners (Statement III).
- Therefore, both Statement II and Statement III are correct, and together they provide the complete explanation for why Statement I is true.