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What is an 'Indenture'

Indenture refers to a legal and binding agreement, contract or document between two or more parties. Traditionally, these documents featured indented sides, as indicated by their name. Historically, indenture also refers to a contract binding one person to work for another for a set period of time, such as an indentured servant. In finance, the word indenture appears when discussing bond agreements, certain real estate deeds and some aspects of bankruptcies.

BREAKING DOWN 'Indenture'

In real estate, an indenture is a real estate deed in which two parties agree to continuing obligations. For example, one party may agree to maintain the property and the other may agree to make payments on it. In bankruptcy law, indenture refers to a mortgage or deed of trust constituting a claim against the debtor or a claim secured by a lien on the debtor's property, and in most cases, the indenture has a security under it, other than a voting trust certificate.

What Are Bond Indentures?

Between bond issuers and bondholders, an indenture is a legal and binding contract specifying all the important features of a bond, such as its maturity date, timing of interest payments, method of interest calculation and callable or convertible features, if applicable. The bond 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.

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

When Are Bond Indentures Used?

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 is then 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.

What Is an Indenture Trustee?

An indenture trustee handles fiduciary duties related to investments. These professionals monitor interest payments, redemptions and investor communications, and they lead trust departments at institutions. Essentially, their role is to oversee and administer security-backed indentures issued by a company.

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