Definition of Indenture

Indenture

Agreement between lender and borrower which details specific terms of the bond issuance.
Specifies legal obligations of bond issuer and rights of bondholders.

Bond indenture

The contract that sets forth the promises of a corporate bond issuer and the rights of
investors.

Asset-coverage test

A bond indenture restriction that permits additional borrowing on if the ratio of assets to
debt does not fall below a specified minimum.

Bond covenant

A contractual provision in a bond indenture. A positive covenant requires certain actions, and
a negative covenant limits certain actions.

Covenants

Provisions in a bond indenture or preferred stock agreement that require the bond or preferred
stock issuer to take certain specified actions (affirmative covenants) or to refrain from taking certain specified
actions (negative covenants).

Deed of trust

indenture.

Default

Failure to make timely payment of interest or principal on a debt security or to otherwise comply
with the provisions of a bond indenture.

Legal defeasance

The deposit of cash and permitted securities, as specified in the bond indenture, into an
irrevocable trust sufficient to enable the issuer to discharge fully its obligations under the bond indenture.

Nonredeemable

Not permitted, under the terms of indenture, to be redeemed.

Nonrefundable

Not permitted, under the terms of indenture, to be refundable.

Optimal redemption provision

Provision of a bond indenture that governs the issuer's ability to call the
bonds for redemption prior to their scheduled maturity date.

Protective covenant

A part of the indenture or loan agreement that limits certain actions a company takes
during the term of the loan to protect the lender's interests.

Redeemable

Eligible for redemption under the terms of the indenture.

Refundable

Eligible for refunding under the terms of indenture.

Series bond

Bond that may be issued in several series under the same indenture.

Sinking fund requirement

A condition included in some corporate bond indentures that requires the issuer to
retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity.

Subordination clause

A provision in a bond indenture that restricts the issuer's future borrowing by
subordinating the new lender's claims on the firm to those of the existing bond holders.

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