Definition: What are Income Bonds?

Income bonds are a special type of corporate bonds.

They are offered by corporations trying to raise money that is needed to continue or grow their operations. 

How is an Income Bond Different?

Income bonds are different than traditional corporate bonds in several ways.

They offer much high returns, but are typically offered by corporations that are facing financial difficulties

Corporations that need to raise money quite badly would normally issue such bonds.

How is an Income Bond Different?

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In order to attract investors, the corporation would be willing to pay a much higher bond rate, than the average market rate.

 This makes income bonds a somewhat risky proposition for an investor, with a higher risk-reward differential.

Additional Overview – What are Income Bonds?

On a standard bond, the company agrees to pay the interest rate on the bond no matter what. On income bonds, this is not the arrangement. 

Rather, the company is agreeing to pay the interest rate marked on the bond only if they make enough profit to do so. 

What are Income Bonds?

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There are a few variations on income bonds:

  • Interest is paid only when that money is earned
  • Although the interest needs to be paid eventually, it can be deferred, sometimes until the maturation of the bond, which of course increases the time the company has to default 

Income bonds are a specialty type of investment product. This is not the type of product designed for the beginning investor, and should certainly be discussed with an investment advisor.

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