Definition: An indenture is a legally binding bond or loan document in which two parties agree on a set of conditions and loan terms requiring the borrower to pay the lender a series of principle and interest payments over time.
What Does Indenture Mean?
What is the definition of indenture? In the financial world, indentures can be most regularly found in bond issues. A bond indenture will specify all its terms: the date of the issue, the time at which payment will be received, the name and information of the company issuing the bonds, the interest rate, and many other elements relevant to both parties.
The indenture constitutes a legally binding obligation to both parties. These instruments are essential to establish a legal framework that can be referred to in the case of a dispute or any complaints from any of the sides involved. They must be signed and are typically notarized as well.
Let’s look at an example.
First Class Financial Services is an investment bank that trades in the New York Stock Exchange. The company needs to issue some bonds to fund their regular operations and approached Pacific Ocean Trust, a company that manages pension funds and retirement accounts, to offer them a part of the issue privately. The Board of Pacific Ocean Trust asked the CEO of First Class Financial Services to present a document that contains all the relevant information about the bond issue being offered.
In this case, what the Board of Pacific Ocean is asking for is the indenture of the bond issue. The contract in which both parties agree to certain conditions established for the bond. So, in order to continue with this transaction, the CEO of First Class should work with his legal team to write the indenture for the issue and then send it over to Pacific Ocean Trust, so they can review it and sign it.
Define Indentures: Indenture means a bond or loan document that describes the terms of the loan.