Certified Plan Sponsor Professional (CPSP) Practice Exam

What is generally considered a debt investment?

1. Stock

2. Bond

3. Commodity

4. Mutual fund

The correct answer is: Bond

A debt investment is characterized by the borrowing of capital, where an investor lends money to an entity (such as a corporation or government) in exchange for the promise of future repayments with interest. Bonds exemplify this type of investment perfectly, as they are essentially loans made by the investor to the issuer. When an investor purchases a bond, they are providing funds to the issuer, who agrees to pay back the principal amount at maturity along with periodic interest payments. This structure defines the nature of debt investments. In contrast, stocks represent ownership in a company and are influenced by the company's performance, making them equity investments, rather than debt instruments. Commodities are physical goods such as metals or agricultural products that are traded on exchanges and do not inherently involve debt agreements. Mutual funds pool together funds from many investors to purchase a diversified portfolio of assets, which can include both stocks and bonds, but the fund itself does not represent a direct debt instrument to the investor. Thus, bonds are the clear representation of debt investments due to their nature of providing loans to issuers with agreed-upon repayment terms.