Exp) Option a is the correct answer.

Statement I is correct: Companies raise long-term funds either by issuing bonds or by selling stocks. When a company issues bonds, it is essentially borrowing money from investors, who are known as bondholders. On the other hand, when a company issues stocks, it is selling ownership shares to investors called stockholders (or shareholders). Regarding returns from an investment in a company, generally, bondholders are considered to be relatively at lower risk than stockholders.

Statement II is correct: A stockholder is considered as the owner of the company with equity rights, while a bondholder is a creditor who lends money and holds no ownership in the company.

Statement III is correct: Bondholders are given repayment priority over stockholders because bonds are issued for a fixed term with a predetermined interest rate and are repayable at maturity. In contrast, capital from shares is not typically returned during the company’s lifetime, and returns to stockholders vary based on the company’s profits.

Thus bondholders are considered as the relatively lower risk than stockholders because bondholders are with no ownership stake, they have a legal right to fixed repayments and are prioritized over stockholders who are the owners of the company and receive returns based on the profit of the company. Hence Option a is correct:  Both Statement II and Statement III are correct and both of them explain Statement I

Note: Option b in the official UPSC Paper is incorrectly mentioned.

Source: https://ncert.nic.in/textbook/pdf/leac202.pdf