Bond indenture definition
/What is a Bond Indenture?
A bond indenture is the contract associated with a bond. The terms of a bond indenture include a description of the bond features, restrictions placed on the issuer, and the actions that will be triggered if the issuer fails to make timely payments. The bond indenture is the core legal document referenced by the bond issuer and investors when there is a dispute regarding bonds.
Contents of a Bond Indenture
A bond indenture will likely include the clauses noted below.
Purpose
This clause states the reason why the bonds are being issued.
Interest Rate
This clause contains the interest rate stated on the face of the bond.
Interest Calculation
This clause describes the formula used to calculate the amount of interest to be paid.
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Payment Dates
This clause contains the dates when interest payments will be made to bondholders.
Maturity Date
This clause contains the maturity date of the bond, when the face amount of the bond will be paid to bondholders.
Call Features
This clause explains the rights of the issuer to buy back bonds prior to the maturity date.
Conversion Features
This clause contains an explanation of the circumstances under which bonds can be converted into the common stock of the issuer, and at what conversion ratio.
Covenants
This clause contains a list of the covenants to which the issuer will be subjected while the bonds are outstanding, and how the covenants are calculated.
Non-Payment Actions
This clause can include a number of possible actions, such as increasing the interest rate, creating a cumulative interest liability, or accelerating the maturity date of the bond. For example, if a bond issuer does not make coupon payments by any scheduled date, then the maturity date of the bond issuance is automatically accelerated. This presents the issuer with a strong incentive to make all coupon payments on a timely basis.