What type of investment is a bond?

What type of investment is a bond?

• A. Equity security
• B. Debt security
• C. Derivative security
• D. Cash equivalent

Answer: (B)

A bond is classified as a debt security because it represents a loan made by an investor to a borrower, typically a corporation or government. When you purchase a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the principal amount being returned at maturity. This lending nature is a fundamental characteristic of debt securities, distinguishing them from equity securities, which represent ownership in a company. In the case of bonds, the investor does not have ownership rights in the issuer's assets or profits; instead, they have a claim on the repayments promised. This specific arrangement of fixed payments over time and the eventual return of the principal is what firmly places bonds in the category of debt securities. Thus, understanding this definition helps clarify the role that bonds play within the broader spectrum of investment types.

A bond is classified as a debt security because it represents a loan made by an investor to a borrower, typically a corporation or government. When you purchase a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the principal amount being returned at maturity. This lending nature is a fundamental characteristic of debt securities, distinguishing them from equity securities, which represent ownership in a company.

In the case of bonds, the investor does not have ownership rights in the issuer's assets or profits; instead, they have a claim on the repayments promised. This specific arrangement of fixed payments over time and the eventual return of the principal is what firmly places bonds in the category of debt securities. Thus, understanding this definition helps clarify the role that bonds play within the broader spectrum of investment types.