Income Bond: Meaning and Example

An income bond is a bond whose interest payments are due only when the issuer has sufficient earnings or meets the contract’s income condition. This makes it riskier and more contingent than an ordinary fixed-coupon bond.

How It Works

Because coupons depend on earnings capacity rather than an unconditional schedule, income bonds shift more risk to investors. They may appear in restructurings or special financing situations where the issuer cannot support a standard fixed obligation.

Worked Example

A distressed company emerging from restructuring might issue income bonds that pay interest only when profits exceed a threshold. Investors accept that structure because the issuer cannot safely commit to a normal coupon.

Scenario Question

An investor says, “If it is called a bond, the coupon must always be fixed and mandatory.”

Answer: No. Income bonds are a reminder that debt contracts can contain contingent payment terms.

Related Terms

• Bond: Income bonds are a special type of bond with contingent coupon payments.
• Credit Risk: The payment uncertainty in an income bond is fundamentally a credit-risk issue.
• High-Yield Bond: Income bonds often appear in higher-risk or restructuring contexts.