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.


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.

  1. Coupon Rate

    Coupon rate is the yield paid by a fixed income security, which ...
  2. Coupon Bond

    A coupon bond is a debt obligation with coupons attached that ...
  3. Bond Discount

    Bond discount is the amount by which the market price of a bond ...
  4. Straight Bond

    A straight bond is a bond that pays interest at regular intervals, ...
  5. Corporate Bond

    A corporate bond is a debt security issued by a corporation and ...
  6. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
Related Articles
  1. Financial Advisor

    Present Value Of Different Bond Types Using Excel

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future - we can use an Excel spreadsheet.
  2. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  3. Investing

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  4. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  5. 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.
  1. Why do bond coupon rates vary so greatly?

    Learn about the two major reasons that cause bond coupon rates to vary so dramatically and what role coupons play in the ... Read Answer >>
  2. What are the risks of investing in a bond?

    Learn more about bond market investment risk, including interest rate risk, reinvestment risk, call risk, default risk and ... Read Answer >>
  3. Are high-yield bonds better investments than low-yield bonds?

    It depends on the amount of default risk you as an investor want to be exposed to. More yield goes hand-in-hand with more ... Read Answer >>
  4. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  5. 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 >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center