What is a Bond Indenture?

A bond indenture is part of the process of buying and selling bonds, and it provides the means of articulating the terms and conditions for the transaction. The specifications given within the bond indenture define the responsibilities and commitments of the seller as well as those of the buyer. This legal document might also be called a deed of trust or a trust indenture.

Much of the information that is contained in the bond indenture has to do with the description of the bond and sales information that is related to the bond. The issuer of a bond will use the indenture to describe the form of the bond, and the description will include enough detail about the issuer and the bond trustee for interested investors to research the background of the bond issue. Within the text of the bond indenture, there typically also are specifics about the repayment schedule that will be managed by the bond trustee. 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.

Other important data supplied within the text of the bond indenture includes the maturity date on the bond, the interest rate that is to be paid to the bondholder and any call provisions or protective covenants that are extended according to the terms of the agreement. If any type of collateral is involved in the sale of the bond, this document will make note of the assets that are pledged. It also will specify the circumstance that would have to occur in order for the collateral to change ownership.

As a document that is designed to ensure that both the bond issuer and the buyer and seller have a clear understanding of the terms of the transaction, the bond indenture generally employs a relatively easy-to-read format. The actual text will include legal terms that are required by the laws of the jurisdiction where the sale is taking place, but the bond indenture tends to follow a logical pattern in identifying the terms. This makes the text of the bond indenture accessible to virtually everyone, especially new investors who might not be familiar with or completely comfortable with documents that contain a great deal of financial terminology.