Bond indenture

A bond indenture is the formal legal contract that spells out the terms of a bond issue and defines the rights and obligations of both the issuer and the bondholders. It covers the coupon rate, the maturity date, any call provisions, the ranking of the debt relative to other obligations, and any covenants the issuer must abide by for as long as the bond is outstanding.

The indenture is typically negotiated between the issuer and a trustee, usually a bank, who is appointed to represent the collective interests of bondholders since individual investors rarely have the resources or standing to enforce the contract on their own. If the issuer violates a covenant or misses a payment, the trustee can act on behalf of bondholders, including declaring a default and pursuing the remedies laid out in the document.

For an investor, the indenture is the actual rulebook governing what can and cannot happen to a bond over its life, more binding than anything described in a summary document. Details like whether a bond is secured by specific assets, whether it can be called early, and how it ranks against subordinated debt or senior debt in a bankruptcy are all set out here, which is why professional bond investors and credit analysts read the indenture directly rather than relying on a summary.