Here we will discuss the main features and characteristics of different categories of bonds including the types of cash flows paid out by a bond issuer to an investor. We will also examine the options given to investors or issuers resulting in the modification of the pattern of the principal and coupon cash flows and various provisions for the early retirement of debt.
A bond's indenture is a legal contract that sets forth in great detail the promises of the issuer (also called debtor or borrower) and the rights of the bondholders. Bondholders (also called investors or creditors) will know what to expect from the issuer as long as they hold the bonds. Since the bonds might change hands among investors, to help monitor that the issuer abides by the terms of the indenture, a third independent party needs to be appointed. This third party who acts on behalf of the bondholders is called an indenture trustee and is usually a bank.
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