how a trust indenture works
bonds are issued to lenders or investors to raise money for a corporation or governmental body to issue a bond the issuer hires a third party trustee usually a bank or trust company to represent investors who buy the bond the agreement entered into by the issuer and the trustee is referred to as the trust indenture a trust indenture is a legal and binding contract that is created to protect the interests of bondholders the trustee s name and contact information is included in the document which highlights the terms and conditions that the issuer lender and trustee must adhere to during the life of the bond the section on the trustee s role is important as it gives a clear indication of how unforeseen incidents will be dealt with for example if a conflict of interest comes up involving the trustee s role as a fiduciary in certain trust indentures the issue must be resolved within 90 days otherwise a new trustee will be hired a trust indenture also includes the characteristics of the bond such as maturity date face value coupon rate payment schedule and purpose of the bond issue one section of the trust indenture dictates the circumstances and processes surrounding a default the indenture establishes a collective action mechanism under which creditors or bondholders can collect in a fair orderly manner if default by the issuer takes place a bondholder should be aware of and understand the proper sequence of events allowing them to take the proper course of action should such a situation occur special provisions of a trust indentureprotective or restrictive covenants are highlighted in a trust indenture for example a trust indenture may indicate whether an issued bond is callable if the issuer can call the bond the indenture will include call protection for the bondholder which is the period during which the issuer cannot repurchase the bonds from the market after the call protection period the indenture may list the first call dates and any subsequent call dates that the issuer may exercise its right to call the call premium that is the price that will be paid if the issuer repurchases the bond is also indicated on the trust indenture almost all indentures include subordination clauses that limit the amount of additional debt that the issuer can incur and that dictate that all subsequent debts are subordinated to prior debts without such restrictions an issuer would theroretically be allowed to issue an unlimited amount of debt increasing bondholders exposure to default risk 