Final answer:
In a bond transaction, the entity that agrees to pay back the borrowed funds and interest is the issuer, which can be a corporation, government entity, or municipality. Bondholders are the investors who loan money to the issuer and receive interest payments. The return on a bond is known as the bond yield, and bonds can potentially lead to capital gains for the investors.
Step-by-step explanation:
In a bond transaction, the entity that makes the commitment to repay the borrowed amount along with interest is known as the issuer. Essentially, when an issuer such as a corporation, city, state, or the federal government issues a bond, they are entering into a financial contract promising to repay the principal amount alongside interest payments over a specified period. This rate of return expected from the bond at the time of purchase is referred to as the bond yield.
The individual or institution providing the loan by purchasing the bond is called a bondholder. They are entitled to receive interest payments periodically. In the event that the issuer fails to fulfill its interest or principal payments, the bondholders have the legal right to take action to try to recoup their investment, although they might face the risk of partial recovery if the issuer's assets are insufficient.
Investment through bonds can also lead to a capital gain if the bond is sold for a higher price than its purchase price. Unlike bonds, a certificate of deposit (CD) is a savings tool offered by banks where funds are deposited for a specified period in exchange for a fixed interest rate, generally higher than a regular savings account.