Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What are bonds?

1. Debt securities representing loans from investors to borrowers

2. Equity securities traded on exchanges

3. Derivatives based on currency exchange rates

4. Short-term trading instruments

The correct answer is: Debt securities representing loans from investors to borrowers

Bonds are classified as debt securities that represent a loan made by an investor to a borrower, which can be a corporation, municipality, or government entity. When an individual purchases a bond, they are essentially lending money to the issuer in exchange for periodic interest payments, known as coupon payments, and the return of the bond's face value upon maturity. This mechanism allows entities to raise capital for various purposes, such as funding projects or managing operational expenses, while providing investors with a predictable income stream. The other options indicate different types of financial instruments. Equity securities, for example, represent ownership in a company and are traded on stock exchanges, which is fundamentally different from the concept of bonds, where the relationship is based on debt rather than ownership. Derivatives, on the other hand, derive their value from other underlying assets, such as currency exchange rates, and are not direct loans like bonds. Finally, short-term trading instruments typically refer to assets such as stocks or money market instruments, which do not encompass the long-term borrowing nature of bonds. Thus, the definition of bonds maintains a distinct role in the financing landscape, characterized by their status as debt securities that facilitate investment and funding through loans.