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CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership

A company's bondholders and its shareholders are both stakeholders in the firm. Which statement best describes the position of the bondholders relative to the shareholders?

Bondholders hold a contractual claim to interest and principal that ranks ahead of shareholders in liquidation. Shareholders, not bondholders, hold the residual claim on assets and normally have the voting rights on board elections. Creditors therefore have seniority but no ownership control.

  1. ABondholders hold a residual claim on the firm's assets
  2. BBondholders hold voting rights on all board elections
  3. CBondholders hold a contractual claim with priority over shareholders in liquidationCorrect

Explanation

Creditors such as bondholders have a contractual claim to interest and principal and rank ahead of shareholders if the firm is liquidated. Shareholders hold the residual claim, so option A describes the wrong group. Voting rights on board elections generally belong to common shareholders, not bondholders.

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