Which definition best describes a bond?

Which definition best describes a bond?

• A. A type of insurance policy
• B. An IOU from a corporation or government
• C. A type of life insurance
• D. A piece of real estate

Answer: (B)

A bond is best described as an IOU from a corporation or government. This means that when an individual purchases a bond, they are essentially lending money to that issuer, whether it be a corporation or a government entity. In return for this loan, the issuer promises to pay back the principal amount on a specified maturity date and typically pays periodic interest payments, known as coupons, until that maturity date is reached. This definition captures the essence of what a bond fundamentally represents in the financial world: a debt obligation that allows issuers to raise capital while providing investors a way to earn interest income. The other options do not accurately reflect this financial instrument, as they pertain to insurance policies or real estate, which are distinctly different from the concept of a bond and its function as a loan.

A bond is best described as an IOU from a corporation or government. This means that when an individual purchases a bond, they are essentially lending money to that issuer, whether it be a corporation or a government entity. In return for this loan, the issuer promises to pay back the principal amount on a specified maturity date and typically pays periodic interest payments, known as coupons, until that maturity date is reached.

This definition captures the essence of what a bond fundamentally represents in the financial world: a debt obligation that allows issuers to raise capital while providing investors a way to earn interest income. The other options do not accurately reflect this financial instrument, as they pertain to insurance policies or real estate, which are distinctly different from the concept of a bond and its function as a loan.