Which statement best describes how an investor makes money off debt?

Step 1: Define the Problem

Identify how an investor can profit from debt instruments.

Step 2: Break Down the Problem

1. Understand the types of debt instruments.
2. Determine the mechanisms through which investors earn returns.

Step 3: Apply Relevant Concepts

• Interest Income: Investors earn interest payments from borrowers.
• Bond Appreciation: Investors can profit from selling bonds at a higher price than they paid.
• Credit Risk Management: Understanding the risk associated with lending and how it affects returns.

Step 4: Analysis, Verify and Summarize

• Interest Income: Regular payments received as compensation for lending money.
• Bond Appreciation: Occurs when market interest rates fall, increasing the bond's market value.
• Credit Risk: Higher risk can lead to higher interest rates, affecting potential returns.

Final Answer

An investor makes money off debt primarily through interest income received from borrowers and potential appreciation in the value of debt instruments like bonds.