Final answer:
Long-term IOUs issued by governments and corporations that pay regular interest are called bonds. They are used to raise funds and come with a promise to pay back the original amount plus interest. Bondholders bear the risk of partial recovery if the issuer defaults.
Step-by-step explanation:
The financial instruments you are referring to are called bonds. These are long-term IOUs issued by corporations and governments to raise funds. Bondholders receive interest payments at regular intervals, known as coupon payments, until the bond reaches its maturity date, when the principal amount (the original loan) is repaid.
An example of bond issuance would be when a company seeks to borrow $10 million by selling bonds with an 8% annual interest rate. They promise to pay $800,000 in interest each year before returning the $10 million after 10 years. Bonds can be sold in smaller denominations, allowing multiple investors to purchase them. For instance, 10,000 bonds could be issued at $5,000 each to raise $50 million total. The risk associated with bonds is that if the issuer fails to make interest payments, bondholders can sue for their money; however, recovery may be limited if the issuer lacks sufficient assets.