Which of the following correctly describes a bond indenture?

• A. A financial statement that summarizes a company's assets, liabilities, and equity at a specific point in time.
• B. A legal contract that specifies the terms and conditions of a bond issue between the issuer and bondholders.
• C. A document that records the transfer of ownership of stocks between investors.
• D. A report detailing the cash inflows and outflows of a business over a period.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the term 'bond indenture'. A bond indenture is a legal contract that outlines the terms and conditions of a bond issue. It serves as an agreement between the bond issuer (e.g., a corporation or government entity) and the bondholders.
2. Step 2: Analyze the options provided in the question. The options describe different financial documents or concepts, such as a financial statement, a legal contract, a stock transfer document, and a cash flow report.
3. Step 3: Compare the definition of a bond indenture to the options. The correct description should align with the legal contract that specifies the terms and conditions of a bond issue.
4. Step 4: Eliminate incorrect options. For example, a financial statement summarizes assets, liabilities, and equity, which is unrelated to bond indentures. Similarly, a stock transfer document and a cash flow report do not pertain to bond indentures.
5. Step 5: Confirm that the correct answer is the option describing a legal contract specifying the terms and conditions of a bond issue between the issuer and bondholders.