Certified Financial Management Specialist Practice Exam

What is the primary purpose of bonds?

1. To represent ownership in a company

2. To provide protection against financial loss

3. To raise funds through debt securities

4. To enable trading of basic goods

The correct answer is: To raise funds through debt securities

The primary purpose of bonds is to raise funds through debt securities. When an entity, such as a corporation or government, issues bonds, it is essentially borrowing money from investors, who in return receive periodic interest payments and the return of the bond’s face value upon maturity. This process allows the issuer to obtain the capital needed for various purposes, such as expanding operations, funding projects, or managing cash flow, while giving investors a relatively secure investment option. Bonds differ fundamentally from stocks, which represent ownership in a company. Instead of equity, bonds represent a creditor relationship with the issuer. Additionally, while some financial instruments provide protection against loss (like insurance products), bonds primarily serve as a means to finance obligations rather than act as a protective measure. Lastly, bonds do not pertain to trading of basic goods; rather, they are financial instruments designed for capital raising through lending. Therefore, the accurate understanding of bonds centers on their role in financing through debt, justifying the choice.