What is the function of bonds in personal finance?

Bonds play a crucial role in personal finance by functioning as a form of investment where individuals lend money to entities such as companies or governments. When you purchase a bond, you are essentially providing a loan that these organizations will use for various purposes, such as funding new projects, infrastructure, or operational needs. In return for this loan, the bond issuer promises to pay back the principal amount at maturity along with periodic interest payments known as coupon payments.

This mechanism allows investors to earn a predictable stream of income and potentially benefit from capital appreciation if the bonds are sold before maturity. Therefore, bonds can serve as a stable investment option, diversifying one's portfolio and reducing risk in comparison to stocks.

The other options do not accurately describe the primary function of bonds. While immediate cash flow may be received from interest payments, it is not the primary role of bonds. Bonds are not designed to offer large dividends like stocks; dividends are typically associated with stock ownership. Lastly, bonds do not facilitate daily transactions, as they are investment instruments rather than transactional currencies. Thus, the correct choice reflects the fundamental nature of bonds in the context of personal finance.