What are debt certificates that are purchased by an investor?
Bonds. A bond is a debt certificate (a fixed-income security) an investor buys, effectively lending money to a government or corporation. In return the issuer pays periodic interest and repays the face value, or principal, when the bond matures.
The answer
The debt certificates that an investor purchases are bonds. A bond is a fixed-income security representing a loan from the investor (the bondholder) to an issuer — a corporation, municipality, or national government. When you buy a bond, you are lending the issuer money. In exchange, the issuer promises to pay you interest (the coupon) at set intervals and to return the principal (the face or par value) on a fixed maturity date.
The word 'certificate' is the giveaway: a bond historically was a paper certificate documenting the debt owed to the holder. Because the payments are contractual and generally fixed, bonds are called fixed-income investments and are considered lower-risk than stocks — though not risk-free.
Why the other options are wrong
Multiple-choice versions of this fill-in-the-blank often list stocks, mutual funds, or certificates of deposit as distractors.
- Stocks (shares) — Incorrect. A stock is an equity instrument: it represents partial ownership of a company, not a loan to it. Stockholders may receive dividends and can vote, but the company has no obligation to repay them a fixed sum. The question specifically says debt certificate, which rules stocks out.
- Mutual funds — Incorrect. A mutual fund is a pooled portfolio that may hold bonds and stocks, but the fund itself is not a debt certificate issued to borrow money.
- Certificates of deposit (CDs) — Tempting because of the word 'certificate,' but a CD is a time deposit with a bank, not a tradable debt security an investor buys from an issuer in the bond market. In exam context, the intended single-word answer is bonds.
The bigger picture: how bonds work and how they differ from stocks
The crucial contrast is debt vs equity. Bonds are debt: predictable interest, priority repayment if the issuer goes bankrupt, but no ownership and limited upside. Stocks are equity: ownership, potentially unlimited upside, but higher risk and lowest priority in bankruptcy. A bondholder earns money two ways — collecting coupon interest and, if they sell before maturity, potentially profiting from a price change (bond prices move inversely to interest rates). At maturity, the issuer repays the face value and the bond ceases to exist. Common types include government (Treasury), municipal, and corporate bonds, plus zero-coupon bonds that pay no periodic interest and are instead sold at a discount to face value. Grasping that a bond is fundamentally a loan you own is what makes the answer unambiguous and separates it from every equity distractor.
| Represents | A loan to the issuer | Ownership in the company |
| Investor is a | Creditor (lender) | Part-owner (shareholder) |
| Income | Fixed interest (coupon) | Variable dividends (if any) |
| Principal repaid? | Yes, at maturity | No repayment obligation |
| Bankruptcy priority | Paid before shareholders | Paid last |
| Typical risk | Lower | Higher |
Frequently asked
What is the difference between a bond and a stock?
A bond is debt — you lend money to the issuer and receive fixed interest plus repayment of principal. A stock is equity — you own a share of the company and may receive dividends. Bondholders are creditors paid before shareholders; stockholders are owners with more risk and more upside.
How do bondholders earn money?
Bondholders earn periodic interest payments, called coupons, based on the bond's rate and face value. They also receive the full face value back at maturity, and if they sell the bond earlier for more than they paid, they can earn a capital gain.
What are the main types of bonds?
The main types are government bonds (such as U.S. Treasuries), municipal bonds issued by states and cities, and corporate bonds issued by companies. There are also zero-coupon bonds, which pay no periodic interest and are sold at a discount to face value.
Is a bond a debt or equity instrument?
A bond is a debt instrument. Buying a bond means lending money to the issuer, who must pay interest and repay the principal. This is different from equity instruments like stocks, which represent ownership rather than a loan.
What happens when a bond matures?
At maturity, the issuer repays the bondholder the bond's face value (principal) and makes the final interest payment. The bond obligation then ends. If the issuer cannot repay, the bond is in default, which is the primary risk bondholders face.