BOND INDENTURE INTRODUCTION

BOND INDENTURE INTRODUCTION

The contract that specifies all the rights and obligations of the issuer and the owners of a fixed income security is called the bond indenture. The indenture defines the obligations of and restrictions on the borrowed and forms the basis for tall future transactions between the bondholder and the issuer. These contract provisions are known as covenants and include both negative covenant (prohibitions on the borrower) and affirmative covenants(actions that the borrower promises to perform) sections.

Negative covenants include restrictions on asset sales ( the company can't sell assets that have been pledged as collateral), negative pledge of collateral (the company can't claim that the same assets back several debt issues simultaneously), and restrictions on additional borrowings (the company can't borrow additional money unless certain financial conditions are met).

Affirmative covenants include the maintenance of certain financial ratios and the timely payment of principal and interest. For example, the borrower might promise to maintain the company's current ratio at a value of two or higher. If this value of the current ratio is not maintained, then the bonds could be considered to be in (technical) default.