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.
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Finance: What is a Closed-End Fund?1 Views
Finance a la shmoop what is a closed-end fund? well it's a type of mutual fund [Man approaches mutual fund desk]
only like a bank at any convenient time it's closed
like its assets are enclosed in its price closed means that the fund itself
doesn't actively trade assets back and forth inside of it on a daily basis like
the most famous closed-end mutual fund in the world is Berkshire Hathaway [Man pushing pram of a baby with Berkshire Hathaway briefcase for a head]
Warren Buffett's you know other child the successful one it owns 40 or 50 key
assets from Geico to train companies to metal machinery firms in Israel to
boatloads of shares of stocks like coca-cola and Gillette and Wells Fargo
all of those assets are wrapped up in a tidy BRK bow and the stock market values [Stock market values appear]
ticker BRK daily by trading it back and forth among investors so yes the assets
inside of the fund do change but in an analogous mutual fund that is open the
value placed on the shares is at what is called net asset value, that value is
calculated by just adding up the 843 stocks at the mutual fund owns or however
many the number is and then just calculating a value based on the number [Calculation appears]
of share units comprising that open end mutual fund the closed-end fund has no
changes that way it's just investors valuing the whole bucket of investments
in one closed number now if you'll excuse us we have to get back to [Baby crying in a crib with Berkshire Hathaway briefcase for head]
babysitting for Warren Buffett isn't she just an angel
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The Trust Indenture Act of 1939 is a set of laws designed to make financial dealings fairer for the average Joe.