A fixed income security that gives the holder the right to receive regular interest payments and a share in the profits/ dividends of the issuer (bond-issuing firm). The interest rate is set out in the terms and conditions of the bond issue, while the issuer’s business profits would determine the magnitude of the share in profits. The interest of a profit sharing bond can be linked to the profits of the entire business or a section thereof.
A special case of profit-sharing bonds is a dividend bond– a bond with the potential to receive a portion of the dividends (distributed profits) earned by its underlying collateral security (typically, a stock). When the dividend on the underlying stock is more than sufficient to pay interest charges on the collateralized bonds, a portion of the surplus earnings will be distributed to the bondholders as a dividend.
Profit sharing bonds are often known as dividend bonds or participating bonds.
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