What is the key difference between equity and a bond?

The key difference highlighted in the correct answer is that equity represents ownership in a company, while a bond is a financial instrument that signifies a loan made to a borrower. When an individual purchases equity, such as shares in a corporation, they gain partial ownership of that company and may benefit from its success through dividends and appreciation in the stock price. This ownership comes with voting rights and a claim on the company’s assets after all debts have been settled.

In contrast, bonds function as a form of debt financing. When an entity issues a bond, it borrows money from investors, with the promise to pay back the principal amount on a specified date along with periodic interest payments. Bondholders do not have ownership in the company; instead, they are creditors who are prioritized in the event of liquidation, receiving their payments before equity holders.

The other answer choices contain inaccuracies about the nature of equity and bonds. For example, while equity can be seen as an asset, this characteristic is not unique to it compared to bonds. Additionally, equity typically offers variable returns based on the company’s performance, whereas bonds usually provide fixed returns through scheduled interest payments. Lastly, the risk associated with equity is often greater than that of bonds, particularly due to the potential for total loss