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What is a Bond Indenture? - Definition & Types

Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

In this lesson, you'll receive an introduction to bond indenture as used in business. You'll also have the chance to look at the terms of a bond indenture for a hypothetical business owner looking to expand his chain of stores.

What is a Bond Indenture?

Bob's Market in Sunnyside, OH, has two stores and its number of customers is growing daily. Bob, the owner, would like to open a third store, but does not have the cash available - it's all tied up in his existing stores! Bob talks to his financial advisers, who suggest he contact some interested individuals about loaning him money.

After speaking with his advisers, Bob decides to move forward and approach some potential investors about funding his new market. Rather than negotiating a lot of individual loans, Bob will issue bonds, which requires the creation of a bond indenture, or contract, between Bob's Market, (the bond issuer) and the bond purchasers. In business, a bond indenture can also be referred to as a deed of trust.

Types of Bonds

There are several different types of bonds, including corporate, government, municipal and zero-coupon bonds. For the purposes of this lesson, we'll look at callable and convertible bonds. If Bob's Market issues callable bonds, it may 'call' the bonds early and return the bondholders their money prior to the maturity date. By comparison, convertible bonds allow bondholders to convert their bonds to stock.

Bond Terms

Contractual details help investors decide whether or not they will buy a bond. Some of the information contained in Bob's Market's bond indentures includes:

  • Par Value: $1000.00 per bond
  • Maturity Date: 05/01/2020
  • Interest Payments: 5% annually but paid 2.5% semi-annually based on par value; bondholders will receive $25 every six months per one bond
  • Callable: No
  • Convertible: No
  • Additionally: All terms and applicable conditions are inserted in this space.

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