University of Central Florida (UCF) ECO3223 Money and Banking Practice Exam 1

The correct term that describes an obligation from a borrower to a lender for future payments is a bond. A bond is a specific type of debt security that is used by entities, such as corporations or governments, to raise funds. When an investor purchases a bond, they effectively lend money to the issuer in return for periodic interest payments and the return of the bond's face value upon maturity.

Bonds clearly illustrate the relationship of obligation between borrower and lender because they encompass specific terms regarding payment timelines, interest rates, and the total amount to be repaid. This contractual nature is foundational in finance, as it establishes the rights of the lender and the responsibilities of the borrower.

In contrast, a liability generally refers to a broader category of financial obligations, which includes bonds but also other types, such as loans and accounts payable. Stock represents ownership in a company and does not create an obligation for future payments to the investor in the same way that bonds do. Lastly, while a financial instrument encompasses various types of investment products, including stocks, bonds, and derivatives, it does not specifically define the obligation for future payments as precisely as a bond does. Thus, "bond" is the most accurate and specific term for an obligation from a borrower to a lender for