Bond Indenture

Bond Indentures Definition

Bond Indenture, also known as bond resolution, is is a core legal document that acts as a contract between the bond issuer and bondholder and contains all the details related to the bond, like details of the issue, purpose of issue, obligations of the issuer of bond & rights of bondholders.

As per The Trust Indenture Act of 1939, any bond issued that is regulated by U.S. Security and Exchange Commission (SEC) must have a trustee; the issuer appoints a trustee or fiscal agent that can be a financial institution or bank which acts as a representative of all the bondholders.

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Component of Bond Indenture

Bond IndentureIndentureIndenture is a legal agreement between two or more parties to meet their respective obligations. It is a common term used in the bond market to provide the lender and borrower with the necessary comfort in the transaction in the event of one defaulting party.read more is the legal contract document between the Bond Issuer and the bondholders. Bond Indenture includes many clauses. Few important ones are listed below:

Bond Indenture Example

Example of Bond Indenture: There is a company XYZ that need capital to expand his business for that he sought advice from his financial advisor. The company’s Financial Advisor suggested raising funds from the people who are seeking to invest their money in such a business.

After a discussion with the advisor, the company decided to approach various investors, and rather than negotiating them individually company decided to create a Bond Indenture or deed of trust, which will act as a contract between XYZ and all investors (Bondholders).

Stakeholders in Bond Indenture

The following are the stakeholders in the bond indenture.

Bond-Indenture

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#1 – Issuer

The issuer generates the Bond Indenture. The indenture contains all the legal details of the issuer of the bond to give a clear picture to the investors.

#2 – Trustee/ Fiscal Agent

The trustee is a bank or financial institution that holds the bond indenture. Trustee roles are primarily providing financial and legal assistance to bondholders. The main role of the trustee is holding the funds until payments are done to bondholders, invoicing the issuer for interest and principal paymentsPrincipal PaymentsThe principle amount is a significant portion of the total loan amount. Aside from monthly installments, when a borrower pays a part of the principal amount, the loan's original amount is directly reduced.read more, calling meetings of bondholders, ensuring all the terms and conditions mentioned in Indenture are properly adhered by the issuer.

#3 – Bondholders

The bondholder is the investor that puts his money in this debt security to receive some periodic income from interest and receive the principal amount at the time of maturity of the bond.

Advantages

  1. Bond Indenture is the legal document; all the clauses mentioned in the document are applicable to all the stakeholders involved in the transaction.
  2. Bond Indenture protect the interest of all the stakeholders and reduce the chance of default.
  3. Indenture clearly defines all the information related to the bond.
  4. The rights and Duties of all the stakeholders are clearly defined in the Indentures that helps in avoiding any confusion.
  5. This document ensures all the stakeholders must be aware of the covenantsCovenantsCovenant refers to the borrower's promise to the lender, quoted on a formal debt agreement stating the former's obligations and limitations. It is a standard clause of the bond contracts and loan agreements.read more for proper transparency.
  6. Indenture is the only legal document that is referred in case of any dispute regarding the bond.

Disadvantages

  1. Indentures are non-transferable; hence there are very limited options available to exit these contracts.
  2. These contracts, once signed, are not renegotiable, so any change in the interest rate due to policy change may have financial repercussions.

Conclusion

Bond Indenture is a core legal document that safeguards the right of both investors and issuers. It contains all information related to the bond, along with the Rights and responsibility of both issuer and bondholders. Indenture has the legal binding on all the stakeholders, and in case of any dispute or default, the indenture will be considered for any resolution.

This has been a guide to Bond Indenture and its definition. Here we discuss the components and stakeholders of bond indenture along with the examples. You can learn more about fixed income from the following articles –

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