The financial accounting term income bond refers to a debt security that provides for periodic coupon payments if the company has sufficient earnings. Interest payments to holders of these securities are not guaranteed. Income bonds are typically issued by companies that are struggling financially.
As is the case with other debt, if the security is issued for a term of five years or more, they represent a long term obligation of the company and are shown in the long term liabilities section of the balance sheet.
Issuing long-term bonds represents an important source of financing for many large companies. Investors holding income bonds are not automatically entitled to the periodic payment of interest. Payment is contingent upon the company generating enough earnings (profits) to pay these bondholders.
Income bonds are typically issued by companies that are struggling financially; oftentimes to avoid bankruptcy. For this reason, these securities would also be considered junk bonds (non-investment quality).
Investors are entitled to the face value of the bond at maturity. The security can also be issued with a feature that entitles the holder to unpaid interest at maturity.