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Closed-End Indentures

A closed-end indenture is a term in a bond contract that prohibits the issuer from using the collateral guaranteed in one issue as collateral for further bond issues in the future.

Subsequent bonds may, in fact, be issued on the same collateral, but these bonds are strictly subordinate to the original issue. Closed-end indentures are in contrast to the open-end indentures, in which subsequent bond issues on the same collateral have equal liens on the property guaranteed as collateral.

Closed-end indentures do not suggest much about the financial security of the issuer - both successful and imperiled corporations may find it expedient to issue bonds under these terms. Regardless of the issuer's financial security, closed-end indentures are specifically designed to appeal to more cautious-minded investors. The coupon on these bonds will be a little lower, but the assurance of first priority among bondholders in case of default or bankruptcy makes the trade-off worthwhile to investors who want to keep their secured bonds truly secure.

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