An indenture is a contract governing the rights of bondholders.
The word was coined to describe a medieval service contract (thus, someone who signed an indenture was "indentured"). Medieval indentures were written in duplicate on one big piece of paper and then cut apart. Each party got a half. The cut was intentionally made wavy, "indented," so that when the pieces were reunited, it was clear they were originals.
I can't explain how this term came to the world of corporate debt. If you know, please tell me!
The earliest corporate debt indentures created a trust for the benefit of bondholders. Issuer assets were placed in the trust and administered by a trustee for the benefit of the bondholders. So, if the issuer missed a payment the trustee could sell the assets. The indenture protected the bondholder's investment and guaranteed that all bonds were worth the same amount.
The Trust Indenture Act (15 USCA s. 77aaa) requires that debt sold to the public be governed by an indenture and that there be a trustee.
No assets are transferred in modern indentures. Instead, the trustee acts as the bondholder's representative. It oversees a trust containing the bondholder's contract rights. "Modern" is a relative term in the indenture context - the most important book on the subject, Commentaries on Model Debenture Indenture Provisions was written in 1965.
Let's look at an example: last year, General Motors Corporation entered into an indenture with The Bank of New York as trustee (ex. 10.3 to 8-K filed 2/25/08). The indenture is a 60-page contract. It contains very broad language about what kind of debt will be issued and very specific language about the duties of the issuer and the trustee. For example, if GM defaults the trustee is empowered to "declare the principal amount ... immediately due and payable" and to "instigate any action or proceeding at law," on behalf of the bondholders.
An indenture is meant to be a durable document. GM's previous indenture was signed in 1995. Also attached to the same 8-K is the first supplemental indenture (ex 10.4) which adds a new section to the indenture describing "4,372,500,000 - 6.75% Series U Convertible Senior Debentures."
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