Bond Indenture

A bond indenture is a legal document in which the agreed terms for the

bond

are specified.

Bond securities

have similar characteristics which are summarized as follows:

  • Maturity date is the date in which the issue bonds are repaid.
  • Interest payments are the promised amounts to the issuer to be paid for the use of the borrowed money
  • Repayment of principal is the promised amount by the issuer to be paid on maturity date.

All the issues of bonds have a master loan agreement called bond indenture that contains all the related information over that issue.

The issuer is required to comply with all the terms and conditions established in the indenture agreement. Not complying with the established terms in the indenture specially that of paying the interests on time as well as the repayment of principal would result on the issuer to be in default.

The following terms of the issue of bonds are the ones normally included in the indenture.

  • The amount of the bond issue
  • The coupon rate 3.
  • The frequency of interest payments (annual or semi-annual)
  • The maturity date

 The call provision if any (this provision allows the issuer of the bonds to call them in and repay them before their maturity dates

 The refunding provision if any (this provision does not allow the issuer to obtain the proceeds from a new debt issue to repay the bondholders of an existing issue before maturity).

 The sinking fund provision if any (this provision offers bondholders greater security in that the issuer sets aside earnings to retire the issue).

 The put options if any (this provision allows the bondholders to sell the bonds back to the issuer at par value).