Indenture

Items rarely ask “what is an indenture”; they hand you a scenario and make you classify a clause, and the tell is a verb. If the issuer is doing something — “shall file audited statements,” “must keep a current ratio above 1.5,” “maintain insurance,” “pay taxes” — it’s affirmative, even though that last pair looks like a rule. If the clause forbids an action — “may not incur additional debt,” “no asset sales,” “restricted payments” — it’s negative. The hinge: negative covenants protect bondholders by constraining the issuer, so tighter covenants lower required yield while covenant-lite structures (a leveraged-loan/high-yield phenomenon) widen spreads. The curveball is that covenants aren’t free — they cost the issuer flexibility, traded for a lower coupon.

Don’t conflate the indenture with default: the indenture defines what counts as an event of default and the trustee’s remedies (acceleration, enforcement), but default is the breach itself. Likewise a call provision isn’t a separate document — the redemption schedule and call price are written into the indenture.