Series 7 practice questionmediumDebt Securities — Corporate Bonds — Income Bond
An income bond (adjustment bond) pays interest:
- AOnly if the issuing corporation has sufficient earnings to do so✓ Correct answer
- BAt a rate that adjusts with market interest rates
- CIn the form of additional bonds instead of cash
- DTax-free to the bondholder
Explanation
Why A — Only if the issuing corporation has sufficient earnings to do so
Income bonds (also called adjustment bonds) pay interest only if the corporation earns enough income to cover the payment. They are typically issued by companies emerging from bankruptcy reorganization as a way to restructure debt. Because of the contingent nature of interest payments, income bonds carry more risk and are not considered a default if interest is missed, making them similar to preferred stock in this regard.
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