Certified Financial Management Specialist Practice Exam

What type of funding do bonds represent?

1. Equity funding

2. Debt funding

3. Charitable funding

4. Self-funding

The correct answer is: Debt funding

Bonds represent debt funding because they are essentially loans made by investors to borrowers, typically corporate or governmental entities. When an organization issues bonds, it is borrowing money from bondholders and, in return, it agrees to pay interest over a specified period and to return the principal, or face value, of the bond at maturity. This relationship classifies bonds as a form of debt financing, where the issuer incurs an obligation to repay the borrowed amount, unlike equity funding, which involves raising capital by selling shares of ownership in the company. This distinction highlights the responsibilities and risks associated with different types of funding sources, where debt holders have priority over equity holders in the event of liquidation or bankruptcy.