What is a bond primarily classified as?

A bond is primarily classified as a type of debt instrument because it represents a loan made by an investor to a borrower, typically a corporation or government. When an entity issues a bond, it is essentially borrowing money from the bondholder, who, in return, receives interest payments over a specified period and is repaid the face value of the bond at maturity. This loan agreement is formalized through a contract, detailing the amount borrowed (the principal), the interest rate (the coupon), and the term of the loan.

In contrast to equity instruments, which represent ownership in a company and come with a claim on the company’s profits, bonds do not provide ownership but instead create a creditor-debtor relationship. Financial derivatives, on the other hand, are contracts whose value is derived from the performance of underlying assets, indices, or rates, such as options and futures. Mutual funds pool money from multiple investors to purchase various securities, which is distinct from the nature of bonds as individual loan agreements. Thus, the essential characteristic of a bond as a debt instrument underlines its primary classification.