What is the main purpose of bonds in public finance?

Bonds in public finance serve primarily to finance specific capital projects. This method allows governments to raise significant funds needed for long-term infrastructure improvements, such as building schools, roads, bridges, or hospitals, which often require substantial initial investments. Since these projects typically provide benefits over many years, using bonds allows the costs to be spread out over the lifespan of the asset and helps manage the budget effectively.

When governments issue bonds, they are essentially taking on debt with the expectation that the future income generated from these capital projects or the increased economic activity they stimulate will be sufficient to cover the debt service. This approach allows municipalities and other government entities to undertake essential projects that they may not otherwise afford upfront using only current revenues.

The other options represent inadequate portrayals of bonds' roles. Bonds do not typically provide unrestricted funds for operational expenses, as they are earmarked for specific projects. They also aren't directly focused on generating revenue through taxation—rather, taxes may be used to pay back the bondholders. Additionally, while bonds can have some similarities to managing short-term loans, most public finance bonds are long-term instruments. Hence, bonds are primarily a means to finance specific capital projects effectively.