In accounting and finance, an indenture is the formal contract behind a bond issue, more fully called a bond indenture. It sets out the rights of the bondholders and the duties of the issuer, and it is the document lawyers, trustees and accountants turn to whenever a question arises about the bonds. The word is occasionally used for the agreement governing an issue of preferred stock.
What an indenture covers
A typical indenture states the face amount, stated interest rate, interest payment dates and maturity date. It names a trustee, usually a bank, to act for the bondholders, and it describes any security pledged, any call or conversion features, and any sinking fund requirements. It also lists the covenants the issuer must keep, such as limits on extra borrowing or a minimum ratio of current assets to current liabilities.
The indenture matters to accountants because its terms drive the bookkeeping. The stated rate determines the cash interest paid, call features affect how early retirement is recorded, and covenants must be disclosed in the notes. If the issuer breaches a covenant, the debt can become payable on demand, which may require it to be reclassified as a current liability. In the United States, publicly offered corporate bonds generally need an indenture that meets the federal Trust Indenture Act of 1939.