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What is an Income Bond?
Income bonds are issued by companies and they will only pay a coupon or interest rate if the company generates adequate earnings to do so.
Non-payment of a coupon or interest rate does not necessarily mean that the company is in default. The principal amount plus some interest is due to the bondholder at maturity. Income bonds are sometimes issued by companies who are experiencing hard times and cannot guarantee a coupon payment to bondholders.
They use it to raise capital by borrowing from investors, and investors might be willing to take a chance on the company if they feel that they could turn things around soon, which could result in a significant yield being paid. Bonds with a credit rating below the B tier are considered highly speculative, and are sometimes called junk bonds, or high yield bonds.
If the company goes bankrupt, bondholders are still near the top of the list of those who will be paid from the assets that exist. At maturity, the bondholder will be entitled to the principal amount plus a certain amount of interest. If the bond was a cumulative one, any coupon payments that were not paid during the life of the bond will be due upon maturity.
It is worth knowing that income bonds are very rarely used.
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