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Income Bonds

Moneyzine Editor
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Moneyzine Editor
1 mins
January 19th, 2024
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Income Bonds

Definition

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.

Explanation

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.

Related Terms

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    The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.
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  • Interest Expense
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  • Commodity-Backed Bonds
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  • The financial accounting term revenue bond refers to a debt security that guarantees repayment, and is secured, by a specific income-generating entity. Revenue bonds are a subset of municipal bonds and are typically issued with a face value of $5,000, with maturities of 20 to 30 years.
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  • General Obligation Bonds
    The term general obligation bond is used to describe a debt security issued by state or local governments. Unlike a revenue bond, which is secured by a specific income-generating entity, a general obligation bond is secured by the municipality's pledge to use all legally available means, specifically tax revenues, to repay this debt.
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  • Accrual Bond
    The term accrual bond refers to a security that does not make periodic interest payments to the bondholder. As interest accrues, it is added to the principal of the bond and paid to the investor when the security matures.
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