What are bonds?

What are bonds?

• A. Investments in stocks traded publicly
• B. Ownership stakes in corporate entities
• C. Loans made to corporations or governments that pay interest over a specified term
• D. Short-term financial instruments with high liquidity

Answer: (C)

Bonds are essentially loans made by an investor to a borrower, which can be a corporation or a government. When an investor purchases a bond, they are providing the issuer with capital in exchange for a promise to receive periodic interest payments, known as coupon payments, and the return of the bond's face value when it matures. This characteristic of paying interest over a specified term defines what a bond is. The other options present differing financial instruments: investments in stocks are equity-based ownership stakes in companies, while short-term financial instruments focus on assets that are easily convertible to cash and typically bear lower risk. Understanding that bonds involve a lending arrangement, along with the expectation of interest earnings and the return of principal, distinguishes them from stocks and other financial products.

Bonds are essentially loans made by an investor to a borrower, which can be a corporation or a government. When an investor purchases a bond, they are providing the issuer with capital in exchange for a promise to receive periodic interest payments, known as coupon payments, and the return of the bond's face value when it matures. This characteristic of paying interest over a specified term defines what a bond is.

The other options present differing financial instruments: investments in stocks are equity-based ownership stakes in companies, while short-term financial instruments focus on assets that are easily convertible to cash and typically bear lower risk. Understanding that bonds involve a lending arrangement, along with the expectation of interest earnings and the return of principal, distinguishes them from stocks and other financial products.