🧷 Authentic Classroom Explanation by IAS Monk

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📌 The Question:

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 explain Statement I

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🧠 Curiosity Raiser

Why do conservative investors prefer bonds while growth-seekers chase stocks?
Because risk follows the repayment line, and bonds stand closer to certainty than ownership.

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📘 Enrichment Notes (Concept Clarity)

🔹 Nature of Investment

• Bondholders = Creditors/Lenders
  ▸ Receive fixed interest
• Stockholders = Owners/Equity holders
  ▸ Returns depend on profits and dividends

🔹 Repayment Priority

• In liquidation or bankruptcy:
  1. Secured creditors
  2. Bondholders (debt)
  3. Stockholders (equity)

➡️ This priority makes bonds less risky than stocks.

Linking the statements

• Statement II explains who bondholders and stockholders are
• Statement III explains why bondholders face lower risk
• Together, they fully explain Statement I

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🧘‍♂️ IAS Monk Whisper

Ownership offers dreams, lending offers certainty. Markets reward both — but differently.