What is a bond?

• A. A A debt instrument representing a loan from an investor to a borrower.
• B. B An equity security representing ownership in a company.
• C. C A derivative contract whose value is derived from an underlying asset.
• D. D A short-term loan instrument issued by a bank.

Answer: (A)

A bond is a debt instrument representing a loan from an investor to a borrower. In this arrangement, the issuer borrows funds and agrees to pay periodic interest (coupons) and to repay the principal at a specified maturity date. Bonds are used by governments, municipalities, and corporations to raise capital, and they trade in markets with prices that reflect interest rates and the issuer’s credit quality. This description directly matches the idea of a debt security that represents a loan from an investor to a borrower, distinguishing bonds from an equity security (ownership in a company) and from derivatives (contracts whose value depends on another asset). A short-term loan instrument issued by a bank is not a bond, since bonds are typically designed as longer-term debt financing, issued by various entities rather than banks' short-term loans.