Indentures

Indentures are formal legal instruments that create binding obligations between parties. In general usage, an indenture is a written contract or deed that records an agreement in which one party is bound to perform certain duties or to refrain from others. The term is historic, deriving from the practice of producing two parchment copies with jagged, or indented, edges so that the two halves could be matched to prevent substitution.

Historically, indentures governed apprenticeships and indentured servitude. Apprenticeships bound a master to teach a trade and the apprentice to learn and obey terms for a fixed period, typically years. In colonial and early modern contexts, many migrants entered into indentures that obligated them to service for a period in exchange for passage, housing, and prospects. While not all indentured workers were enslaved, the system imposed legal restraints on freedom of movement and duration of service.

In modern finance, a bond indenture is the contract between an issuer of debt securities and the holders of those securities. It specifies the security’s principal amount, interest, maturity, redemption features, and covenants that govern the issuer’s behavior (positive and negative covenants) and events of default. A trustee is often appointed to represent the holders and enforce the indenture. The indenture may be regulated by law, such as the Trust Indenture Act of 1939 in the United States, which requires certain debt issues to be issued under a formal indenture.

Termination or modification of an indenture typically requires consent by a specified proportion of holders unless the terms provide a separate mechanism.