Bond Indenture vs. Bond Agreement

by Debbie Donner

A bond is essentially a debt that is used as a type of investment vehicle. If you invest in bonds, you are in effect, loaning money to the company issuing the bonds. As the seller, the company is agreeing to repay the principal amount loaned, by a specific date known as the maturity date. You are paid periodic interest (coupons) if you purchase interest-bearing bonds. The difference between a bond indenture versus a bond agreement can depend on the bond issuer.

Bond Indenture

In simplest terms, a bond indenture is the contract between the bond issuer and an investor. The contract outlines the terms of the bond, the promise of the issuer and your rights as an investor. Some of the aspects covered in a bond indenture, also called a bond indenture agreement, include the maturity date, the coupon rate (stated rate of interest) and any special features of the particular bond. Bonds are required by the Securities and Exchange Commission (SEC), to have indentures, which are typically summarized in the bond prospectus. A prospectus is a formal and legal document that presents details about the structure and goals of the issuing bond company.

Bond Agreement

A bond agreement is often defined as “a contract for privately placed debt.” More specifically, bond agreements represent privately placed securities or investment vehicles that are not for sale to the general public, but instead, they are sold directly to institutional investors (banks, brokerages, and savings and loan institutions). Bond agreements are typically issued by smaller companies. Bond agreements may be eligible for exemption from SEC registration requirements, which could present slightly more risk to you as an investor, without having the contractual agreement a bond indenture provides.

Bond Characteristics

A bond’s maturity refers to the length of time before the issuing company is required to pay bond holders the principal amount of the bond. The par or face value of a bond is the price at which the issuer sets the bond upon issuance. The premium refers to the amount for which the bond sells above its par value. In other words, if you purchase a $500 bond for $550, the premium you paid was $50. You may be able to purchase discount bonds below their face values due to falling interest rates or adverse market conditions, through either a bond indenture or bond agreement.

Special Features

Multiple types of bonds exist, in which you can invest. Two special features of some bonds are convertibility and whether a bond is callable. The bond indenture indicates whether the bond is callable. When a bond is callable, it means the bond can be redeemed at par or face value, prior to the maturity date. However, callable bonds are only redeemable early, under certain conditions and at a stated price. Once the bond has been called, you no longer receive coupons. Convertible bonds are those bonds that give you the option of trading the bond for a specified amount of the issuing company’s stock. The specific dates, prices and conditions under which the bond may be converted must be detailed in writing.