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.