Which instrument is a loan you give to a company or government that pays interest?

• A. Dividends
• B. Stock
• C. Capital Gains
• D. Bond

Answer: (D)

The key idea is understanding debt instruments that involve lending money to a company or government in exchange for interest. A bond is exactly that: you loan money to the issuer for a set period, and in return you receive regular interest payments (coupons) and your principal back at maturity. This makes bonds a loan you make to the issuer, with compensation in interest. In contrast, dividends are payments to stockholders from a company’s earnings; stock represents ownership in a company; and capital gains are profits from selling an asset for more than you paid for it. None of those involve lending money to the issuer in exchange for interest in the way a bond does.