Which instrument is a fixed-income security that pays periodic interest and returns principal at maturity?

• A. Bond
• B. Common stock
• C. ETF
• D. Mutual fund

Answer: (A)

Think about what a fixed-income security provides: a promise to return the original investment plus regular interest payments. A bond is exactly that. It is a debt instrument issued by a government or company, with periodic coupon payments and the repayment of the principal when it matures. This combination of steady interest and principal repayment is what makes it a fixed-income security.

Common stock represents ownership in a company, and while it may pay dividends, there’s no guaranteed return of principal and the value can go up or down. An ETF or a mutual fund is a fund structure that pools money to hold a portfolio of assets; they themselves aren’t fixed-income securities, though they may invest in bonds. Their returns depend on the performance of the underlying holdings and aren’t guaranteed to return principal at a specific date.