Newbies Bond-Issuing Procedures

Bond-Issuing Procedures

State and federal laws govern bond issuances. Bond issuers also want to ensure that they do not violate any of their existing contractual agreements when issuing bonds. Authorization of bond issuances includes the number of bonds authorized, their par value, and the contract interest rate. The legal document identifying the rights and obligations of both the bondholders and the issuer is called the bond indenture Contract between the bond issuer and the bondholders; identifies the parties’ rights and obligations., which is the legal con-tract between the issuer and the bondholders. A bondholder may also receive a bond certificate as evidence of the company’s debt.

A bond certificate Document containing bond specifics such as issuer’s name, bond par value, contract interest rate, and maturity date., such as that shown in Exhibit 14.2, includes specifics such as the issuer’s name, the par value, the contract interest rate, and the maturity date. Many companies reduce costs by not issuing paper certificates to bondholders.¹

EXHIBIT 14.2 Bond Certificate

Point: Indenture refers to a bond’s legal contract; debenture refers to an unsecured bond.

¹The issuing company normally sells its bonds to an investment firm called an underwriter, which resells them to the public. An issuing company can also sell bonds directly to investors. When an underwriter sells bonds to a large number of investors, a trustee represents and protects the bondholders’ interests. The trustee monitors the issuer to ensure that it complies with the obligations in the bond indenture. Most trustees are large banks or trust companies. The trustee writes and accepts the terms of a bond indenture before it is issued. When bonds are offered to the public, called floating an issue, they must be registered with the Securities and Exchange Commission (SEC). SEC registration requires the issuer to file certain financial information. Most company bonds are issued in par value units of $1,000 or $5,000. A baby bond has a par value of less than $1,000, such as $100.