What is a corporate bond?

A corporate bond is fundamentally a financial instrument used by corporations to raise capital. When an investor purchases a corporate bond, they are lending money to the issuing corporation with the expectation that the corporation will repay the principal amount back at a specified future date, known as the maturity date. In addition to the repayment of principal, the corporation typically pays periodic interest payments to bondholders, which is often referred to as the coupon rate.

This structure makes corporate bonds a fixed-income investment, providing a reliable income stream through interest payments, while also being tied to the performance and creditworthiness of the issuing corporation. The risk associated with corporate bonds can vary significantly based on the company's financial health and stability.

In contrast to other choices, government-related borrowing is characterized by bonds issued by the government, which have different risk and return profiles. Investments in stocks relate to equity ownership in a company rather than debt obligations and typically involve the potential for dividends. Lastly, venture capital investments involve funding new startups, which carry a different risk and potential return profile compared to corporate bonds. Thus, the choice of a pledge to repay money to investors with interest by a corporation accurately defines a corporate bond.