What is an 'Income Bond'

An income bond is a type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments paid only if the issuing company has enough earnings to pay for the coupon payment.

An income bond is also called an adjustment bond.

BREAKING DOWN 'Income Bond'

A traditional corporate bond is one that makes regular interest payments to bondholders and upon maturity, repays the principal investment. Bond investors expect to receive the stated coupon payments periodically and are exposed to a risk of default in the event that the company has solvency problems and is unable to fulfill its debt obligations. Bond issuers that have a high level of default risk are usually given a low credit rating by a bond rating agency to reflect that its security issues have a high level of risk. Investors that purchase these high risk bonds demand a high level of return as well to compensate them for lending their funds to the issuer.

There are some cases, however, when a bond issuer does not guarantee coupon payments. The face value upon maturity is guaranteed to be repaid, but the interest payments will only be paid depending on the earnings of the issuer over a period of time. The issuer is liable to pay the coupon payments only when it has income in its financial statements, making such debt issues advantageous to an issuing company that is trying to raise much needed capital to grow or continue its operations. Interest payments on an income bond, therefore, are not fixed but vary according to a certain level of earnings deemed sufficient by the company. Failure to pay interest does not result in default as would be the case with a traditional bond.

The income bond is a somewhat rare financial instrument which generally serves a corporate purpose similar to that of preferred shares. However, it’s different from preferred shares in that missed dividend payments for preferred shareholders are accumulated to subsequent periods until they are paid off. Issuers are not obligated to pay or accumulate any unpaid interest on an income bond at any time in the future. Income bonds may be structured so that unpaid interest payments accumulate and become due upon maturity of the bond issue, but this is usually not the case; as such, it can be a useful tool to help a corporation avoid bankruptcy during times of poor financial health or ongoing reorganization.

Income bonds are typically issued either by companies with solvency problems in an attempt to quickly raise money to avoid bankruptcy or by failed companies in reorganization plans looking to maintain operations while in bankruptcy. In order to attract investors, the corporation would be willing to pay a much higher bond rate than the average market rate.

RELATED TERMS
  1. Zero-Coupon Bond

    A zero-coupon bond is a debt security that doesn't pay interest ...
  2. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  3. Rate Level Risk

    Rate level risk refers to the fact that the value of an existing ...
  4. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  5. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  6. Bond Fund

    A bond fund is a fund invested primarily in bonds and other debt ...
Related Articles
  1. Investing

    Corporate Bonds for Retirement Accounts

    Corporate bonds are usually the preferred choice in retirement accounts. Here are some of the benefits of corporate bonds, and strategies for a portfolio.
  2. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  3. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  4. Investing

    The Benefits of a Bond Portfolio

    Bonds are often viewed as stocks' less-glamorous sidekick, but they deserve more respect from investors. Learn how a fixed-income portfolio works.
RELATED FAQS
  1. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  2. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  3. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center