Definition and Concept
A bond is a financial contract obliging the issuer to repay a specified principal amount with interest at regular intervals. It establishes a debtor-creditor relationship, often with a fixed interest rate (coupon) and maturity period, commonly used by governments or corporations to raise capital.
Key Elements
- Principal: The amount to be repaid.
- Maturity Date: The date on which repayment is due.
- Coupon Rate: The interest rate to be paid to the bondholder.
Legal Obligations and Case Laws
Bonds typically include:
- Indenture Agreement: A document detailing bond terms and conditions.
- Covenants: Terms protecting bondholders, such as limits on additional debt issuance.
Case Laws:
1. Bank of New York Mellon v. Realogy Corporation (2008):
Highlighted that bonds must respect covenants protecting bondholders during corporate restructuring.
2. Broad v. Rockwell International Corp (1980):
Established that trustees must protect bondholders, allowing them to enforce terms if necessary.
3. Metropolitan Life Insurance Co. v. RJR Nabisco, Inc. (1989):
Stated that changes in ownership cannot automatically trigger bond default, upholding that covenants must be clear and enforceable.
Conclusion
Bonds provide structured, legally enforceable investment options for raising capital, with protections for both issuers and investors. Key case laws reinforce bondholder rights, making bonds a reliable, balanced choice for funding with defined obligations and benefits for both sides.