Financial Accounting and Reporting-CPA Practice Exam

The correct answer is income bonds. Income bonds are a unique type of debt security that pays interest contingent upon the issuer meeting specified income objectives. This means that if the issuer does not earn enough income to meet those objectives, they may not be obligated to pay interest to bondholders. This characteristic makes income bonds particularly appealing to issuers who may be in a financially volatile situation, as they provide flexibility in managing interest payments. Participating bonds offer an additional attribute where interest payments may vary based on the performance of the issuer, but they do not strictly depend on achieving specific income goals like income bonds do. Zero coupon bonds do not pay periodic interest at all; instead, they are sold at a discount and provide returns only when they mature. Term bonds refer to a type of bond that has a set maturity date and typically pay regular interest but are not linked to income performance. Therefore, income bonds stand out for their conditional interest payment structure.