Which of the following is not a characteristic of bonds?
A. Fixed interest payments B. Return of face value at maturity C. Ownership stake in the issuing entity D. Predetermined maturity date
The Correct Answer and Explanation is :
The correct answer is C. Ownership stake in the issuing entity.
Explanation:
Bonds are a type of debt instrument used by corporations, municipalities, and governments to raise capital. When an investor buys a bond, they are essentially lending money to the issuer (e.g., a corporation or government), who in return agrees to pay back the loan with interest over time. The investor receives interest payments, typically at a fixed rate, throughout the bond’s term until it reaches its maturity date.
Let’s break down why each characteristic listed is true for bonds, except for option C:
- Fixed Interest Payments (Option A): Bonds often have fixed interest rates, known as “coupon rates.” These payments are made periodically (usually semi-annually or annually) to the bondholder, allowing them to earn a steady income. Fixed interest rates provide predictability for investors, making bonds attractive for conservative investors who seek a stable return.
- Return of Face Value at Maturity (Option B): When a bond reaches its maturity date, the issuer is obligated to repay the bond’s face value (or principal) to the bondholder. This return of principal, combined with interest payments, makes bonds a relatively secure investment for those who hold them to maturity.
- Ownership Stake (Option C): This is not a characteristic of bonds. Unlike stocks, bonds do not provide any ownership in the issuing entity. Bondholders are creditors, not owners, meaning they do not have voting rights, influence over the company’s management, or any entitlement to a share of the company’s profits. This lack of ownership is what differentiates bonds from stocks, which represent an ownership stake in a corporation.
- Predetermined Maturity Date (Option D): Bonds come with a specified maturity date, which is the date when the issuer must repay the bond’s principal. This feature provides clarity on the length of time an investor’s capital will be tied up and when they can expect the return of their initial investment.
In summary, option C is the correct answer because bonds do not convey ownership rights in the issuing entity, differentiating them from equity investments like stocks.