Which of the following is true about bonds?
A They entitle their owners to variable payments made at the discretion of the issuer
B They have a fixed maturity date
C They represent ownership in a corporation
D They entitle their owners to voting rights in a corporation
E They give their owners a risk-free source of income
The correct answer and explanation is:
The correct answer is B: They have a fixed maturity date.
Bonds are debt instruments issued by corporations, governments, or other entities to raise capital. They function as loans where the issuer borrows money from the bondholder and agrees to repay the principal amount (also called the face value) at the bond’s maturity date. Bonds typically have a fixed maturity date, meaning the issuer promises to repay the bondholder on that specific date. This makes bonds an investment with a defined time frame for repayment.
Here is an explanation of why the other options are incorrect:
- A: They entitle their owners to variable payments made at the discretion of the issuer – This is incorrect because most bonds offer fixed interest payments, known as coupon payments, which are typically predetermined at the time of issuance. These payments are not made at the discretion of the issuer but are a contractual obligation.
- C: They represent ownership in a corporation – This statement applies to stocks, not bonds. Stocks represent equity ownership in a company, while bonds represent debt. Bondholders are creditors, not owners of the company.
- D: They entitle their owners to voting rights in a corporation – This is also incorrect. Voting rights in a company are generally granted to stockholders, not bondholders. Bondholders are not involved in company decision-making through voting.
- E: They give their owners a risk-free source of income – This is incorrect because bonds are not risk-free. While government bonds (especially those from stable countries) are considered relatively low risk, they still carry risks such as interest rate risk, credit risk, and inflation risk.
In summary, bonds are debt securities with a fixed maturity date, providing bondholders with regular, fixed interest payments until the maturity date, when the principal is repaid.