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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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The financial accounting term long term debt is defined as the loans and other debt obligations of a business that are payable in twelve months or longer. Long term debt appears in the liabilities section of a company's balance sheet.Moneyzine EditorNovember 6th, 2024
The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.Moneyzine EditorNovember 6th, 2024
The term commodity-backed bonds refers to debt securities that are linked to the price of a commodity. These securities are typically issued in one of two ways. The rate of interest paid on the bond can change as the price of the commodity fluctuates. Alternatively, the face value of the bond can increase or decrease as the price of the commodity changes.Moneyzine EditorJanuary 11th, 2024- 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.Moneyzine EditorNovember 6th, 2024
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.Moneyzine EditorNovember 6th, 2024
The term ability to pay refers to the capacity of a borrower to successfully make the interest and principal payments on its debts. A borrower's ability to pay is one of the critical factors lenders evaluate before writing a loan.Moneyzine EditorDecember 12th, 2023
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.Moneyzine EditorNovember 6th, 2024
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