Question

Which one of the following is a unique characteristic of an income bond?

1) Interest income is tax-free.
2) Interest income is paid at the time of issuance.
3) Coupon payments are dependent on the issuer's income.
4) Coupon payments are paid on a regular monthly basis.
5) Coupon payments can be converted into equity shares.

Answer 1

An income bond's distinctive feature is that its coupon payments are contingent on the issuer's ability to generate income, setting it apart from conventional bonds with fixed-interest payments.

Step-by-step explanation:

The unique characteristic of an income bond is that coupon payments are dependent on the issuer's income. Unlike traditional bonds, which have fixed interest payments, an income bond offers coupon payments only if the issuer earns sufficient income to cover the payments. This feature differentiates income bonds from other types of bonds and fulfills the requirements of companies that may have fluctuating income patterns and therefore cannot commit to regular interest payments.