UPSC Prelims 2025 · GS Paper I

Question 7: Economy and Social Development

Consider the following statements :

Statement IAs regards returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.
Statement IIBondholders are lenders to a company whereas stockholders are its owners.
Statement IIIFor repayment purpose, bondholders are prioritized over stockholders by a company.

Which one of the following is correct in respect of the above statements?

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

bBoth Statement I and Statement II are correct and Statement I explains Statement II

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

dNeither Statement II nor Statement III is correct

AnswerThe answer is (a).

A bondholder lends money to the company and is a creditor; a stockholder owns a share of the company. Interest on bonds is a fixed claim paid before dividends, and in a winding up creditors are repaid before owners, who get only what remains. Because bondholders hold a fixed, senior claim, their returns are less uncertain, so they carry lower risk than stockholders. Statements II and III are therefore both correct, and together they explain Statement I. Remember: lenders are paid first, owners last.

I. Bondholders have a fixed, senior claim, so their risk is relatively lower.
II. Bondholders are lenders; stockholders are owners. This explains Statement I.
III. Creditors are repaid before shareholders, which also explains Statement I.

How you could have got this

No shortcut here: in a “how many” question, ruling out options doesn’t help. Every statement has to be judged.

This follows an unofficial answer: UPSC has not published its key for this year, and if that answer is wrong, so is this path.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong

(a) Right: all three are true, and II and III together explain why bonds are less risky.
(b) Wrong: Statement I does not explain II; the lender status is the cause of lower risk, not the other way round.
(c) Wrong: both II and III are correct, not just one.
(d) Wrong: both II and III are correct.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2025, General Studies Paper I, Series A. The paper on upsc.gov.in.