Which term describes a debt instrument issued by a corporation to raise capital?

• A. Corporate Bonds
• B. Government Bonds
• C. Municipal Bonds
• D. Stock Options

Answer: (A)

A debt instrument issued by a corporation to raise capital is a corporate bond. In this arrangement, the company borrows money from investors and pledges to pay a fixed or variable interest rate (the coupon) on a schedule and to return the principal at a specified maturity date. Corporate bonds reflect the borrowing needs of the issuer and carry risk that depends on the company’s creditworthiness, which is why they’re priced and rated accordingly.

This differs from government bonds, which are issued by a government entity to fund public expenditures; municipal bonds, issued by states or municipalities for local projects; and stock options, which are equity-based instruments giving the holder the right to buy company stock and do not constitute a loan to the issuer.