What are bonds?

Bonds are essentially debt instruments that are issued by corporations, municipalities, or governments to finance a variety of projects and activities. When an entity issues a bond, it is essentially borrowing money from investors, who in return receive a promise for repayment along with interest at specified intervals. This interest payment is typically called a coupon.

Investors who purchase bonds are essentially lending their money to the issuer for a predetermined period, known as the maturity period. At the end of this period, the issuer is required to repay the principal amount, or face value, of the bond, in addition to the interest payments made during the life of the bond.

This mechanism allows entities to raise capital without diluting ownership, which is a common concern with issuing shares. The promise of a fixed interest payment also makes bonds a relatively stable investment compared to the equity markets. Thus, option B accurately captures this concept of bonds being certificates that indicate a debt obligation with specified interest terms.