Income Bonds

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

Bonds on which the payment of interest is contingent upon earnings.  Income bonds usually grow out of railroad re-organizations in which holders of defaulted mortgage bonds are required to accept income bonds.  The principal of income bonds may be secured by a mortgage, but one that constitutes only a junior lien, or they may be collateral trust bonds or plain debentures.  Interest on income bonds does not constitute a fixed charge and is payable out of earnings only after all fixed charges have been met.  Failure to pay interest on income bonds, except when earned, does not entitle the bondholders to the right to sue.  Interest is not paid if earnings are insufficient, but if the entire interest requirements for the issue are not earned, usually such portion as is earned may be declared payable.  Income bonds are cumulative or noncummulative, interest being dependent on declaration by the board of directors, as in the case of stocks.

Generally, income bonds are not high-grade investments and are the least desirable of all the bonds of a given corporation.  They usually rank just above the preferred stock.

See ADJUSTMENT BONDS

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