Definition:
A bond indenture is a legal contract between a bond issuer and bondholders that outlines the terms and conditions of a bond issue. It serves as a roadmap for the relationship between the issuer and the bondholders, specifying their rights and obligations.
Key components of a bond indenture:
- Principal amount: The face value of the bond.
- Coupon rate: The interest rate paid on the bond.
- Maturity date: The date on which the bond will mature and the principal will be repaid.
- Payment terms: The frequency and timing of interest payments.
- Covenants: Restrictions or requirements imposed on the issuer, such as limitations on debt levels or dividend payments.
- Default provisions: Provisions outlining what happens if the issuer defaults on its obligations.
Why are bond indentures important?
- Investor protection: Bond indentures protect the rights of bondholders by outlining the terms of the bond issue and specifying the issuer’s obligations.
- Legal document: Bond indentures are legal documents that are enforceable in court.
- Risk management: Bond indentures can help to manage risk by outlining the terms of the bond issue and specifying the issuer’s obligations.
In essence, a bond indenture is a legal contract that outlines the terms and conditions of a bond issue, providing protection for bondholders and ensuring that the issuer meets its obligations.
