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What Is a Trust Indenture?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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    2003-2016
    Conjecture Corporation
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A trust indenture is a type of bond agreement that is executed between the issuer of the bond and a trustee that is charged with representing the interests of the bondholder. The agreement helps to define the rights, privileges, and responsibilities that each party is agreeing to observe from the date of the bond purchase until the bond reaches its maturity date. In some cases, the trust indenture will include information on how the income used to honor the terms of the bond will be obtained.

Typically, a trust indenture is included as a section or portion of a bond contract. It is important to note that in some nations, this particular approach to defining the rules and responsibilities related to the bond purchase are not the common approach. Instead, a section known as the bond resolution provides this type of detail. In both instances, there may be governmental regulations that help to determine the exact verbiage that is used in this type of agreement, including setting limits on what type of demands each party may make of the other during the life of the bond issue.

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With the agreement, expectations are set for how the trustee will be notified of any returns or interest payments that are due, and how those payments will be tendered. Many nations also allow for the inclusion of provisions that make it clear what happens if the bond issue should go into default. While bonds are considered one of the safest investments available today, there is still the possibility of the issuer defaulting on the debt obligation, making it necessary for investors to be protected against that loss to some degree. The provisions found in the trust indenture help to define what actions the trustee may take on behalf of the investor and receive some type of compensation even if the issuer does default on the bond.

Along with identifying the protections and benefits afforded to the investor, the agreement also defines the role that the trustee will play in the management of the investment. This includes provisions that allow for the removal of the trustee if there is some type of conflict with the investor. Often, the terms of the trust indenture will provide for a specified period of time for the conflict to be resolved. Should it not be possible to resolve the issue, the terms found in the trust indenture allow for the appointment of a new trustee once that pre-determined time frame has passed.

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