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Bond indenture

The legal contract governing a bond: the coupon, maturity, seniority, covenants, call schedule, events of default and the trustee's powers.

Everything that matters when things go wrong is in the indenture, not in the price screen. Call schedules, change-of-control puts, restricted payment baskets and the definition of an event of default all live there.

Modern high yield indentures contain baskets that allow collateral to be moved to unrestricted subsidiaries, which has produced several high-profile liability management exercises where one group of creditors is disadvantaged relative to another. Reading the document is the whole job in distressed investing.

Example: an indenture permits a first call at 103 after three years. The bond trades at 106 with four years left, so any yield analysis must use yield-to-call at 103, not yield-to-maturity.

Related: covenant, callable-bond, seniority, yield-to-call, distressed-debt

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.