A bond which allows the holder to receive a guaranteed minimum rate plus extra coupon payments up to a specific level if the issuer would manage to achieve a preset level of income or profits. This bond, thus, entitles the holder additional benefits beyond its fixed rate of interest. In this sense, participating bonds are similar to income bonds and preferred stocks, except that the former type is eligible for interest deductibility

In practice, this type of bonds doesn’t appeal to common shareholders for its participatory feature.

This bond is also referred to as a profit-sharing bond or at times as a dividend bond.