What are bonds?

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.