Which statement best describes how an investor makes money from investing in debt securities?

• A. By exercising stock options to purchase shares at a discount
• B. By earning dividends paid out of company profits
• C. By selling shares at a price higher than the purchase price
• D. By receiving periodic interest payments and the return of principal at maturity

Answer: (D)

Verified step by step guidance

1. Understand the nature of debt securities: Debt securities are financial instruments issued by entities (such as corporations or governments) to raise funds. They typically involve borrowing money from investors with a promise to repay the principal amount at maturity along with periodic interest payments.
2. Recognize the primary way investors earn money from debt securities: Investors receive periodic interest payments, which are calculated based on the interest rate (coupon rate) specified in the debt security agreement.
3. Understand the return of principal: At the maturity date of the debt security, the issuer repays the original principal amount to the investor, completing the investment cycle.
4. Compare debt securities to other investment types: Unlike equity securities (stocks), which generate returns through dividends or capital gains, debt securities focus on fixed interest payments and principal repayment, providing a predictable income stream.
5. Conclude that the correct answer is: 'By receiving periodic interest payments and the return of principal at maturity,' as this describes the fundamental way investors earn money from debt securities.