What are bonds classified as?

Bonds are classified as debt securities because they represent a loan made by an investor to a borrower, typically a corporation or government. When an investor purchases a bond, they are effectively lending money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity. This relationship establishes a creditor-debtor dynamic where the bondholder is entitled to the repayment as specified in the bond agreement.

Unlike equity securities, which give the holder ownership in a company, bonds do not convey ownership rights but instead create a financial obligation for the issuer. Consequently, the returns from bonds are generally more stable and predictable when compared to equities, which can experience significant volatility. Some bonds may even carry specific privileges, such as being backed by assets or payments in case of default, further highlighting their classification as debt instruments.

In contrast, cash equivalents are short-term investments that can easily be converted into cash; they do not encompass the features of a bond. Similarly, alternative investments may include assets like hedge funds or real estate but are not synonymous with the debt nature of bonds. Moreover, while some bonds can be volatile, classifying them as alternative investments overlooks their primary function as debt securities.