Bond Purchase Agreement (BPA): What it is, How it Works

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.

What Is a Bond Purchase Agreement (BPA)?

A bond purchase agreement (BPA) is a legally binding document between a bond issuer and an underwriter establishing the terms of a bond sale. The terms of a bond purchase agreement will include sale conditions, among other things, such as sale price, bond interest rate, bond maturity, bond redemption provisions, sinking fund provisions, and conditions under which the agreement may be canceled.

Key Takeaways

• Bond purchase agreements (BPAs) include conditions that must be met before an underwriter purchases the bonds, and conditions in which the underwriter may withdraw.
• The terms laid out in a bond purchase agreement may include price, interest rate, maturity date, any redemption provisions, and any other cancellable provisions.
• Typically, the issuer must notify the underwriter of any changes in its financial condition, and the agreements will limit the assets that are being used as collateral.
• BPAs are typically private placement securities or investment vehicles issued by smaller companies.

Understanding a Bond Purchase Agreement (BPA)

A bond purchase agreement is a contract that provides certain clauses that are executed on the date the new bond issue is priced. The terms and conditions of a BPA include:

• Terms of the bonds.
• Conditions that must be met before the purchase of the bonds by the underwriter.
• Execution and delivery date and place of the bonds.
• Conditions under which the underwriter may withdraw from the contract without penalty.
• Purchase price and interest rate of the bonds.
• Expenses to be paid by various parties.
• Certain SEC requirements to be followed by all parties.

A bond purchase agreement has many conditions. For example, it could require that the issuer does not take on any other debt secured by the same assets that will secure the bonds the underwriter is selling, and it could stipulate that the issuer notify the underwriter of any adverse change in the issuer's financial position. The bond purchase agreement also guarantees that the issuer is who it says it is, that it is authorized to issue bonds, that it is not the subject of a lawsuit, and that its financial statements are accurate.

The bonds—once paid for by the underwriter—will be duly executed, authorized, issued, and delivered by the issuer to the underwriter. After the issuer delivers the bonds to the underwriter, the underwriter will put the bonds on the market at the price and yield established in the bond purchase agreement and investors will purchase the bonds from the underwriter. The underwriter collects the proceeds from this sale and earns a profit based on the difference between the price at which it purchased the bonds from the issuer and the price at which it sells the bonds to fixed-income investors.

A bond purchase agreement is a document that stipulates the conditions of a sale between the bond issuer and the underwriter of the bonds.

Bond Purchase Agreement vs. Bond Indenture

A BPA is similar to a bond indenture (or trust indenture) in that they are both contracts established between an issuer and an entity on the terms of a bond. While a BPA is an agreement between the issuer and the underwriter of the new issue, the indenture is a contract between the issuer and the trustee who represents the interests of bond investors.

The terms of the bond highlighted in the bond indenture include the bond’s maturity date, face value, interest payment schedule, and purpose of the bond issue. For example, a trust indenture may indicate whether an issue is callable. If the issuer can “call” the bond, the indenture will include call protection for the bondholder, which is the period of time during which the issuer cannot repurchase the bonds from the market. The Securities and Exchange Commission (SEC) requires that all bond issues, except municipal issues, have bond indentures.

Bond purchase agreements typically represent privately placed securities or investment vehicles issued by smaller companies. These securities are not for sale to the general public, but instead, are sold directly to underwriters. Furthermore, bond agreements may be eligible for exemption from SEC registration requirements.