Arizona State University (ASU) Fin300 Fundamentals of Finance Final Practice Exam

A corporate bond is defined as a debt security that is issued by a corporation to raise capital. When a company needs to fund its operations, invest in new projects, or refinance existing debts, it may opt to issue bonds. By purchasing a corporate bond, an investor is effectively lending money to the corporation. In return, the corporation agrees to pay interest to the bondholder at specified intervals and to repay the principal amount of the bond when it matures.

This instrument represents a fixed-income investment, meaning that the investor receives regular interest payments and returns of principal under agreed-upon terms. Corporate bonds are typically rated by credit agencies, which assess the risk of the issuer’s ability to meet its debt obligations, influencing how investors perceive the risk associated with these bonds.

The other options represent different financial instruments or concepts: a stock signifies ownership in a company, government-issued instruments refer to securities like Treasury bonds, and investment funds pool resources from various investors for collective investment purposes. Each of these plays a distinct role in financial markets and does not align with the definition of a corporate bond.