When purchasing a corporate bond:
Answer: (c), investors are making a loan to the company.
A "corporate bond" is a debt security issued by a corporation obligating the corporation to pay interest periodically and repay the principal at maturity. Corporate bonds typically pay a higher rate of interest than federal or municipal government bonds but the interest earned is generally fully taxable. Corporations issue corporate bonds for a variety of reasons, including for growth of operations and acquisitions of equipment or companies. The advantage evident by the issuance of bonds over the issuance of equity securities is that bonds (at least non-convertible bonds) do not dilute the percentage ownership of outstanding equity holders. However, the issuance of bonds does increase the outstanding liabilities of the corporation.
