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. Thus, an indenture will likely include the following clauses:
- Purpose. The agreement states the reason why the bonds are being issued.
- Interest rate. This is the interest rate stated on the face of the bond.
- Interest calculation. This is a description of the formula used to calculate the amount of interest to be paid.
- Payment dates. The dates when interest payments will be made to bond holders.
- Maturity date. The maturity date of the bond, when the face amount of the bond will be paid to bond holders.
- Call features. This explains the rights of the issuer to buy back bonds prior to the maturity date.
- Conversion features. This is an explanation of the circumstances under which bonds can be converted into the common stock of the issuer, and at what conversion multiple.
- Covenants. This is 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 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.
The bond indenture is the core legal document referenced by the bond issuer and investors when there is a dispute regarding bonds.