What type of financial security is a bond?

A bond is classified as a promise to repay funds. When an individual or entity purchases a bond, they are effectively lending money to the issuer of the bond, which can be a corporation, municipality, or government. In return for this loan, the bond issuer agrees to pay back the principal amount at a specified future date, known as the maturity date, along with interest payments, also called coupon payments, at regular intervals. This relationship creates a legal obligation for the issuer to repay the borrowed amount, thus highlighting the bond's nature as a financial security that represents a debt rather than ownership, prepayment, or derivatives.

Other classifications, such as ownership stakes or prepaid financial instruments, do not apply to bonds because bonds do not signify ownership in the company or asset (which would be the case with stocks) nor are they prepayment mechanisms. Additionally, bonds are not financial derivatives, as they are direct debt instruments rather than contracts based on the price movements of other assets. Hence, defining a bond primarily as a promise to repay funds encapsulates its essence in financial terms.