Which of the following best describes the function of a bond?

The correct description of the function of a bond is that it represents a loan made by an investor to a borrower. When an investor purchases a bond, they are essentially lending money to the issuer of the bond, which may be a government, municipality, or corporation. In return for this loan, the issuer promises to pay the investor periodic interest payments and to return the face value of the bond at maturity. This structure is central to the concept of bonds as fixed-income securities, where the investor receives a predictable stream of income in the form of interest until the bond matures.

Understanding this function is critical because it distinguishes bonds from other types of financial instruments. For instance, stocks represent ownership in a company and thus provide a claim on profits, but they are not a loan. Similarly, investments in stock indices involve equity ownership and would not involve any borrowing or lending between an investor and issuer like bonds do. Lastly, a cash transaction involving no interest does not capture the essence of a bond, as bonds inherently include interest payments as a key feature of their structure and purpose.