DEFINITION of 'Bond Purchase Agreement'

A bond purchase agreement (BPA) is a legally binding document between a bond issuer and an underwriter establishing the terms of a bond sale. The terms of a bond purchase agreement will include sale conditions, sale price, bond interest rate, bond maturity, bond redemption provisions, sinking fund provisions and conditions under which the agreement may be canceled.

BREAKING DOWN 'Bond Purchase Agreement'

A bond purchase agreement (BPA) is a contract that provides certain clauses that are executed on the date the new bond issue is priced. The terms and conditions of a BPA includes:

  • the terms of the bonds;
  • the conditions which must be met before the purchase of the bonds by the underwriter;
  • the execution and delivery date and place of the bonds;
  • the conditions under which the underwriter may withdraw from the contract without penalty;
  • the purchase price and interest rate of the bonds;
  • the expenses to be paid by various parties; and
  • certain SEC requirements to be followed by all parties.

A bond purchase agreement has many conditions. For example, it could require that the issuer not take on any other debt secured by the same assets that will secure the bonds the underwriter is selling, and it could stipulate that the issuer notify the underwriter of any adverse change in the issuer's financial position. The bond purchase agreement also guarantees that the issuer is who it says it is, that it is authorized to issue bonds, that it is not the subject of a lawsuit, and that its financial statements are accurate.

The bonds, once paid for by the underwriter, will be duly executed, authorized, issued and delivered by the issuer to the underwriter. After the issuer delivers the bonds to the underwriter, the underwriter will put the bonds on the market at the price and yield established in the bond purchase agreement and investors will purchase the bonds from the underwriter. The underwriter collects the proceeds from this sale and earns a profit based on the difference between the price at which it purchased the bonds from the issuer and the price at which it sells the bonds to fixed income investors.

Bond Purchase Agreement vs. Bond Indenture

A BPA is similar to a bond indenture (or trust indenture) in that they are both contracts established between an issuer and an entity on the terms of a bond. While a BPA is an agreement between the issuer and the underwriter of the new issue, however, the indenture is a contract between the issuer and the trustee who represents the interests of bond investors. The terms of the bond highlighted in the bond indenture include the bond’s maturity date, face value, interest payment schedule, and purpose of the bond issue. For example, a trust indenture may indicate whether an issue is callable. If the issuer can “call” the bond, the indenture will include a call protection for the bondholder, which is the period of time during which the issuer cannot repurchase the bonds from the market. The Securities and Exchange Commission (SEC) requires that all bond issues, except municipal issues, have bond indentures.

Bond purchase agreements typically represent privately placed securities or investment vehicles issued by smaller companies. These securities are not for sale to the general public, but instead, are sold directly to underwriters. Furthermore, bond agreements may be eligible for exemption from SEC registration requirements.

RELATED TERMS
  1. Put Bond

    A put bond is a bond that allows the bondholder to force the ...
  2. Bond

    A bond is a fixed income investment in which an investor loans ...
  3. Trust Indenture

    A trust indenture is an agreement in a bond contract made between ...
  4. Term Bond

    Term bonds mature on a specific date in the future and the bond ...
  5. Extendable Bond

    An extendable bond (or extendible bond) is a long-term debt security ...
  6. Bond Market

    The bond market is the environment in which the issuance and ...
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  3. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  4. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  5. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  6. Investing

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  7. Investing

    The Best Bet for Retirement Income: Bonds or Bond Funds?

    Retirees seeking income from their investments typically look into bonds. Here's a look at the types of bonds, bond funds and their pros and cons.
  8. Investing

    The Basics Of Municipal Bonds

    Investing in municipal bonds may offer a tax-free income stream, but such bonds are not without risks. Check out types of bonds and the risk factors of muni-bond.
  9. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
RELATED FAQS
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
  2. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  3. Where can I buy government bonds?

    The type of bond dictates its purchase. Federal bonds are issued by the federal government, while municipal bonds are issued ... Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center