A corporation regularly borrows money from investors and promises to pay regular interest and to repay the principal at the end of the loan period. Thus, these investments provide higher return to investors, but they also expose them to price volatility, liquidity, and default risk. What type of investment does this describe?

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Quizplus · Accepted Answer

This scenario describes bonds. Corporations regularly borrow money from investors and issue bonds, which are securities that contain the firm's promise to pay regular interest and to repay the principal at the end of the loan period, often 20 or more years in the future. These investments provide higher return to investors than short-term, interest-bearing accounts, but they also expose investors to price volatility, liquidity, and default risk.

A Corporation Regularly Borrows Money from Investors and Promises to Pay