Question

Which of the following instruments is 'not' a debt instrument?

• A. Stocks
• B. Bonds
• C. Debentures
• D. Mortgages

Hint:

Remember: Debt involves a obligation of repayment with interest (Bonds, Debentures, Mortgages), while Equity represents ownership (Stocks).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Financial assets are broadly categorized as either debt instruments or equity instruments.
- Debt Instruments: Represent a contractual obligation where the borrower receives capital and must repay the principal along with fixed or variable interest over time.
- Equity Instruments: Represent ownership interest in a business, offering returns through dividends and capital appreciation without any repayment obligations.

Step 2: Detailed Explanation:
Let us evaluate each of the options provided:
- Option (A) Stocks: Purchasing stocks (or shares) gives the investor an ownership stake in the company. Stocks do not carry an obligation of fixed interest or principal repayment by the company. Thus, stocks are equity instruments, not debt.
- Option (B) Bonds: These are fixed-income instruments issued by governments or corporations to borrow money from investors. They are debt instruments.
- Option (C) Debentures: These are unsecured debt instruments backed only by the general creditworthiness and reputation of the issuing corporation, rather than by physical collateral. They are debt instruments.
- Option (D) Mortgages: These are secured debt agreements where a borrower receives a loan to purchase real estate, using the property as collateral. They are debt instruments.
Thus, stocks are the only non-debt instrument listed.

Step 3: Final Answer:
The correct option is (A).