What are bonds in the context of financing capital projects?

Bonds are debt instruments that governments or corporations issue to raise capital for financing various projects, including capital projects such as infrastructure development, building facilities, or funding large investments. When a bond is issued, the issuer borrows money from investors and, in return, promises to pay back the principal amount on a specified maturity date along with periodic interest payments, known as coupons.

This definition is crucial for understanding how municipalities and other entities can fund their capital requirements without needing to leverage immediate cash reserves or alter their equity structures. Bonds enable organizations to access substantial amounts of capital upfront, which can be utilized over long-term projects, while spreading the repayment over time, thus not straining current financial resources.

In contrast, the other options do not align with the nature of bonds. For example, equity instruments do require repayment in a different context (dividends or stock buybacks), short-term loans pertain to bank financing rather than public issuance of securities, and cash reserves reflect saved funds rather than raised capital through debt obligations. Understanding these distinctions helps reinforce the fundamental role bonds play in capital financing.