How do bonds function in the financial market?

Bonds function in the financial market as debt securities that are issued by various entities, including governments, municipalities, and corporations. When an entity issues a bond, it is essentially borrowing money from investors. In return, the issuer promises to pay back the principal amount on a specified maturity date and typically agrees to make regular interest payments, known as coupon payments, throughout the life of the bond.

This mechanism allows entities to raise funds for various purposes, such as financing infrastructure projects or expanding business operations, while providing investors with a relatively stable source of income. The bond market also plays a critical role in the overall financial system, influencing interest rates, investment strategies, and the economy at large.

The other options refer to different financial instruments. Stocks represent ownership in a company, cash equivalents refer to very liquid assets easily convertible to cash, and equity shares imply a stake in the company rather than a loan. Thus, they do not accurately describe the function of bonds in the financial market.