Which of the following attracts only interest but leaves the capital unpaid?
Answer Details
A bond is a financial instrument that represents a loan made by an investor to a borrower. In return for lending their money, the investor receives periodic interest payments and the promise of repayment of the principal amount at maturity.
Out of the given options, the financial instrument that attracts only interest but leaves the capital unpaid is an **irredeemable bond**.
An irredeemable bond, also known as a perpetual bond, is a type of bond that does not have a maturity date. This means that the issuer of the bond does not have the obligation to repay the principal amount to the investor at any point in the future.
Instead, the issuer makes periodic interest payments to the investor for as long as the bond remains outstanding. These interest payments compensate the investor for lending their money, but the principal amount is never repaid.
The main attraction of an irredeemable bond is that it provides a predictable stream of income in the form of interest payments. However, the investor is exposed to the risk that the bond issuer may default on the interest payments. Since the principal amount is not repaid, the investor does not have the potential for capital appreciation from the bond.
In summary, an irredeemable bond attracts only interest payments but does not repay the principal amount.