Closed-End Indenture

No, you will not become an indentured servant if you purchase a bond with a closed-end indenture provision. So you can stop watching Downton Abbey as research.

Every bond issue comes with some form of collateral to secure the bond issue, just like you put up your home as collateral when you take out a home equity loan. Collateral could be in the form of buildings and real estate, boxcars on a train, or a portfolio of securities such as stocks, other bonds, and Treasury notes. While it may be hard to believe, there are some bonds, called open-end indentures, that are secured with only a partial claim to collateral, since the same collateral was pledged to more than one bond issue. But with a closed-end indenture bond, holders have the exclusive right to the collateral that was pledged to secure the bond. Since this type of bond carries less risk than an open-end indenture bond, the premium is usually lower.

So if the bond issuer defaults on the bond, you would be entitled to whatever collateral was put up to secure it. With an open-end indenture bond, you might not be considered to have a “senior claim” to the collateral, and if they default you could be left holding the bag. You might think this could never happen, but consider the city of Detroit filing for bankruptcy not too long ago, and the continuing economic struggles in Puerto Rico with many public entities defaulting on their bond issues.