Bond Indenture
Quick Definition
The legal contract between a bond issuer and bondholders that specifies the bond's terms, covenants, and the rights and obligations of each party.
What Is Bond Indenture?
A bond indenture is the formal legal agreement between a bond issuer (borrower) and bondholders (lenders) that details every aspect of the bond's terms and conditions. This contract specifies the coupon rate, payment dates, maturity date, par value, and any special features like call provisions or conversion rights. Importantly, the indenture contains covenants — legally binding promises by the issuer. Affirmative covenants require the issuer to do certain things (maintain insurance, pay taxes, provide financial statements), while negative covenants restrict activities (limit additional borrowing, prevent asset sales, restrict dividend payments). A trustee — typically a large bank — is appointed to represent bondholders' interests and ensure the issuer complies with all indenture terms. If the issuer violates a covenant, bondholders can declare a default and accelerate repayment of all outstanding principal.
Bond Indenture Example
- 1A high-yield bond indenture might restrict the issuer from taking on debt exceeding 4x EBITDA or paying dividends above 50% of net income
- 2When a company violates its debt-to-equity covenant in the indenture, bondholders can demand immediate repayment
Related Terms
Corporate Bond
A debt security issued by a corporation to raise capital, paying periodic interest and returning principal at maturity.
Debenture
An unsecured bond backed only by the issuer's general creditworthiness and reputation, without specific collateral pledged.
Bond Rating
A credit quality grade assigned by rating agencies (S&P, Moody's, Fitch) that assesses the issuer's ability to repay principal and interest.
Default Risk
The probability that a bond issuer will fail to make scheduled interest or principal payments, potentially resulting in partial or total loss for bondholders.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
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