Lesson 4 of 5 · 12 min
The indenture, repayment sources and collateral
The bond indenture is the legal contract behind a bond, and among other things it tells investors where the money to repay them will come from and whether specific assets stand behind the promise.
In short
- The bond indenture sets out the bond's form and features, the issuer's obligations and bondholders' rights, the sources of repayment, commitments to bondholders and any credit enhancements.
- Sovereigns repay from taxes (and can print currency); local governments from taxes or project fees (tolls, transit fares); corporates from operating cash flow; ABS from a pool of loans or receivables.
- Unsecured corporate bonds rely only on operating cash flow. Secured bonds add a lien or pledge on specific assets (collateral) as a secondary source.
- Collateral can be physical assets, cash flows such as licensing fees, or third-party financial guarantees.
- Credit enhancement lowers borrowing cost but reduces the issuer's operating flexibility.
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