A bond indenture agreement is a contract or legal document that records the obligations of the bond issuer and the benefits that will be given to the bondholder. A bond indenture may also be called a bond resolution, a bond contract, or a deed of trust. A bond indenture is a contract that is blanket and unconditional. This type of bond is used when state and federal governments approve bonds that are given to the public and when a set amount of bonds is authorized by the government agency.

A bond indenture is not issued to the bondholder. Instead, it is issued to a trustee or third party who acts as a representative for the bondholder. The trustee or third party can be a bank or financial institution, which monitors the stipulations of the agreement. Rights and details that are listed in the bond indenture agreement include:

  • Ownership details.
  • Right to receive interest payments.
  • Right to receive principal payments.
  • The interest rate or coupon rate.
  • Dates when interest must be paid.

Other terms and conditions related to the bond will be listed, as well as the consequences from nonpayment. Nonpayment may result in severe penalties, including liquidating the assets of the issuer.

What Is an Indenture Agreement?

An indenture agreement is a contract between a bond issuer and bondholders. The indenture agreement is a technical document that covers all the provisions related to the bond and how the bond is managed daily. The agreement includes details relating to:

  • Terms and conditions of the bonds.
  • The exact date of maturity.
  • Interest payment timing.
  • Interest payment calculations.
  • Specific details related to special features.

Exact instruction is given to the bondholders about:

  • If the bonds are called, who to contact.
  • Procedures for tendering their certificates.
  • How compensation is received.
  • Description of what the certificates will look like.
  • The language the bond will be written.
  • A list of financial covenants the issuer must follow.
  • Formulas for calculations to prove the issuer is meeting the covenants.

Due to the technical nature of the indenture agreement, some situations benefit from a trustee appointed to act on behalf of the bondholder. The trustee is usually a large bank. The trustee will oversee that the bondholder is sure he or she is meeting important markers such as:

  • Meeting the covenants.
  • Paying the interest on time.
  • Collecting and distributing certificates properly.

The indenture agreement is a document that is written and signed as a formal way to dispute any legal disagreements between the issuer and bondholders. An indenture agreement is not the same as a prospectus, which is a summary description. The prospectus outlines the goals and structure of the bond company and is a legal and formal document.

Bond Indenture Versus Bond Agreement

A bond is an investment vehicle where you loan money to the company issuing the bonds. Characteristics of bonds include:

  • The length of time before bondholders receive payment of the principal amount of the bond is called maturity.
  • The face value, or the par, of the bond, is the price the issuer sets when issued.
  • The premium is the amount sold above par or face value.

A bond that is callable can be redeemed before the maturity date for par or face value. Redeeming a callable bond is only possible at a specific price and when certain conditions are in place. Convertible bonds include the option to trade the bond for a set amount of the issuing company's stock. Convertible stocks must list the dates, pricing information, and any conditions in writing.

The bond indenture agreement is a contract that outlines the promise made by the issuer, the terms of the bond, and the investor's rights. A bond indenture agreement includes:

  • Maturity date.
  • Coupon rate, which is the stated interest rate.
  • Special features of the bond.

A bond agreement is described as a contract used for privately placed debt. For securities or investment vehicles that are private (not sold to the general public), bond agreements are used when issued by smaller companies and sold to banks, savings and loan institutions, and brokerage firms. Exemption from SEC registration requirements is possible for bond agreements that may increase the investor's risk level, without the contractual agreement that comes with a bond indenture agreement.

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