What is a bond?

A bond is essentially a financial instrument that represents a loan made by an investor to a borrower, which is typically a corporation or government. When an investor purchases a bond, they are lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity. This means that the issuer promises to repay the principal amount of the bond along with interest at specified intervals.

Bonds are considered fixed-income securities, as the bondholder receives regular interest payments, often referred to as coupon payments, until the bond matures. At that time, the principal amount is also repaid to the bondholder. This structure makes bonds a key component of investment portfolios, particularly for those seeking a steady income stream and lower risk compared to stocks.

In contrast to other options, while securing a loan is a part of a bond's function, the promise and the financial specifics of repayment along with interest are what define a bond most clearly. Thus, defining a bond as simply a promise to secure a loan would not accurately capture its essential characteristics. Additionally, bonds differ from stocks, which represent ownership in a company instead of debt obligations. Lastly, while financial guarantees do exist, they are a broader category of products and do not specifically describe