An indenture is the legal agreement between a bond issuer and the bond purchasers. An indenture specifies all aspects of the bond arrangement, including the following:

  • Bond maturity date
  • Timing of interest payments
  • Method used to calculate interest
  • Any actions triggered if bond payments are not made
  • Any call features under which the issuer can buy back bonds early
  • Any conversion features, where bond holders can convert the bonds into the equity of the issuer
  • Any covenants that the issuer must observe during the term of the bonds

In essence, an indenture states all aspects of a bond arrangement, including how the parties interact under all possible scenarios, such as bond calls, bond conversions, covenant breaches, and the nonpayment of interest.