A bond indenture is a legal contract issued to lenders that defines
commitments and responsibilities of the seller and the buyer.
LEARNING OBJECTIVES [ edit ]
Use a bond's indenture to understand the terms of the bond
Understand the rights and responsibilities of the parties to the bond
KEY POINTS [ edit ]
Terms of indentures include the interest rate, maturity date, repayment dates, convertibility,
pledge, promises, representations, covenants, and other terms of the bond offering.
A bond indenture is held by a trustee. If the company fails to live up to the terms of the bond
indenture, the trustee may bring legal action against the company on behalf of the bondholders.
The offering memorandum, also known as a prospectus, is a document that describes a financial
security for potential buyers.
TERMS [ edit ]
indenture
a document, written as duplicates separated by indentations, specifying such a contract
public debt offerings
A public debt offering is the offering of debt securities of a government, a company or a similar
corporation to the public.
convertibility
Quality of a bond that allows the holder to convert into shares of common stock in the issuing
company or cash of equal value, at an agreed-upon price.
Give us feedback on this content: FULL TEXT [edit ]
A bondindenture(also called a trust
indenture or deed of trust) is a legal
contract issued to lenders. The
specifications given within the bond
indenture define the responsibilities and
commitments of the seller as well as those
of the buyer by describing key terms such
as the interest rate,maturity date,
repayment dates, convertibility, pledge,
promises, representations, covenants, and
other terms of the bond offering. Failure
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to meet the payment requirements calls for drastic penalties, including liquidation of
the issuer's assets .
Indenture
Bond indenture (also trust indenture or deed of trust) is a legal contract issued to lenders.
Because it would be impractical for the corporation to enter into a direct agreement with each
of the many bondholders, the bond indenture is held by a trustee - usually a
commercial bankor other financial institution - appointed by the issuing firm to represent the
rights of the bondholders. The issuer of a bond will use the indenture to describe detail about
the issuer and the bond trustee for interested investors to research the background of the
bond issue. This is to ensure that the bondholder has a clear idea of when to expect interest
payments, as well as whom to contact if he or she has questions or concerns. If the company
fails to live up to the terms of the bond indenture, the trustee may bring legal action against
the company on behalf of the bondholders.
When the offering memorandum is prepared in advance of marketing a bond, the indenture
will typically be summarized in the "description of notes" section. This offering
memorandum, also known as a prospectus, is a document that describes a
financial security for potential buyers. A prospectus commonly provides investors with
material information about mutual funds, stocks, bonds, and other investments, such as a
description of the company's business, financial statements, biographies of officers and
directors, detailed information about their compensation, any litigation that is taking place, a
list of material properties, and any other material information.
In the United States, public debt offerings in excess of $10 million require the use of an
indenture of trust under the Trust Indenture Act of 1939. The rationale for this is that it is
necessary to establish a collective action mechanism under which creditors can collect in a
fair, orderly manner if defaulttakes place (like that which occurs during bankruptcy).