Income bond
Also known as: adjustment bond
An income bond is a corporate bond that promises to repay principal at maturity but pays interest only if the issuer earns sufficient income and its board declares the payment. They are typically issued by companies reorganizing after financial distress.
An income bond — also called an adjustment bond — is a corporate debt security with an unusual twist: the issuer is obligated to repay the principal at maturity, but interest is paid only if the company generates enough earnings and its board of directors approves the payment. Missing an interest payment on an income bond is not an act of default.
These bonds usually appear when a company is reorganizing out of bankruptcy. Creditors exchange their old bonds for income bonds, giving the struggling company breathing room — it "adjusts" its debt burden by paying interest only when it can afford to. Because the income stream is so uncertain, income bonds trade flat, meaning without accrued interest, and typically at a deep discount to par.
Despite the name, income bonds are among the worst choices for an investor who actually needs income — the interest may never be paid. They are speculative instruments suited to investors betting on the issuer's recovery, and the exam-favorite trap is recommending an income bond to a customer with an income objective.
The Series 7, Series 6, and SIE exams all touch on income bonds, both as a corporate debt product and in contrast with income-oriented mutual funds — know that they pay interest only when earned and declared, trade flat, and are unsuitable for income-seeking investors.
Key takeaways
- An income (adjustment) bond pays interest only if the issuer has sufficient earnings and the board declares the payment.
- Principal is still owed at maturity, and a skipped interest payment is not a default.
- Income bonds are typically issued during bankruptcy reorganizations and trade flat, without accrued interest.
- They are speculative and unsuitable for investors seeking dependable income — a classic exam trap.