Indenture

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What is an 'Indenture'

An indenture is a legal and binding contract between a bond issuer and the bondholders. The indenture specifies all the important features of a bond, such as its maturity date, timing of interest payments, method of interest calculation, callable/convertible features if applicable and so on. The indenture also contains all the terms and conditions applicable to the bond issue. Other critical information included in the indenture are the financial covenants that govern the issuer and the formulas for calculating whether the issuer is within the covenants.

BREAKING DOWN 'Indenture'

Should a conflict arise between the issuer and bondholders, the indenture is the reference document used for conflict resolution. As a result, the indenture contains all the minutiae of the bond issue.

In the fixed-income market, an indenture is hardly ever referred to when times are normal. But the indenture becomes the go-to document when certain events take place, such as if the issuer is in danger of violating a bond covenant. The indenture will then be scrutinized closely to make sure there is no ambiguity in calculating the financial ratios that determine whether the issuer is abiding by the covenants. The indenture is another name for the bond contract terms, which are also referred to as a deed of trust.

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