Bonds

A bond is a commonly recognized interest investment issued by companies and by public agencies at all levels of government. A bond is a document representing a loan from the holder to the issuer. The bond's cost, or par value, is the principal amount. In return, the issuer promises to pay the bondholder interest at recurring intervals (e.g., semiannually or quarterly) until a definite maturity date. At this maturity date, the issuer must pay the remaining interest accompanied by the entire par value.

Profit Sharing

Profit sharing is practiced by all manner of companies as a collective effort on the part of management to promote employee productivity. In profit sharing, a company earmarks a portion of all earnings that is subsequently allocated among its employees. These earnings may constitute a bonus as part of a paycheck or be deposited as contributions to employees' retirement savings.

Profit-Sharing Bonds

Profit sharing is not employment- or incentive-related in the context of profit-sharing bonds, also called participation bonds. Rather, the term refers to a company's earnings being available to bondholders. Along with a fluctuating yield, an issuer assigns profit sharing bonds a company earnings percentage. Interest and earnings on these bonds change from period to period. Consequently, bondholders benefit from the higher of the two: a bond's interest payment or a percentage of the issuer's earnings.

Convertible vs. Profit-Sharing Bonds

Profit-sharing bonds should not be mistaken for convertible bonds. Unlike the former, convertible bonds bear a clause that equates them with a number of stock shares for which the bond may be exchanged. Moreover, once this exchange occurs, the holder forfeits all remaining bond interest for dividends on the stock shares. Profit-sharing bonds cannot be converted to shares, but offer holders the higher of earnings and interest.