Quick Answer
The Uniform Practice Code accrues bond interest on a 30/360 day-count, added to price through, but not including, settlement (or trade date for cash trades). It requires due-bills for late-record-date cum-distribution sales and due-bill checks for cash dividends; a buyer can claim a missed distribution through the seller. The requesting party pays the transfer agent's fee.
Bond settlement adds wrinkles that equity settlement does not have: interest accrues continuously, distributions can fall in inconvenient places relative to settlement, and transfer fees must be allocated. The principal must understand how each piece of the bond-settlement framework operates.
Computation of Interest
For interest-paying securities other than "cash" trades, accrued interest is added to the dollar price.
What "Accrued Interest" Means
For a regular-way transaction, interest runs through the day before the next business day following trade date, normally scheduled T+1 settlement. A later delivery fail does not automatically move this cutoff. The buyer compensates the seller for the seller's holding period when the buyer will receive the coupon.
Day-Count Convention
The standard convention for corporate bonds is 30/360:
- 30 days per month, regardless of the actual calendar
- 360 days per year, regardless of leap years
So February has 30 days, January has 30 days, every month has 30 days for purposes of accrued-interest calculation. A bond paying $50 per year accrues $50 / 360 ≈ $0.139 per day, regardless of the actual calendar.
Government securities use a different convention (actual/actual), which counts the actual calendar days. The 30/360 convention applies to corporate issues under the Uniform Practice Code.
Cash Trade Carve-Out
For "cash" transactions (delivery on trade day), accrued interest is added up to but not including the trade date (since trade date is settlement date for a cash trade).
Fractions of a Cent
Fractions of a cent in accrued-interest calculations are rounded:
- 5 mills or more (0.005 or more) round up to the next cent
- Less than 5 mills are disregarded (round down)
A calculated accrued interest of $0.0045 rounds to $0.00. A calculated value of $0.0050 rounds to $0.01.
Exam Tip: Gotchas
- Corporate bonds use 30/360 day count; government securities use actual/actual. The exam will give a bond type and ask which convention applies.
- Regular-way interest runs through the day before the next business day after trade date. Distinguish that scheduled cutoff from a delayed actual delivery date.
- Cash trades accrue interest up to but not including the trade date. Because trade date IS settlement date for a cash trade.
- 5 mills or more round up; less than 5 mills round down. This is the standard rounding rule.
Due-Bills and Due-Bill Checks
A due-bill is a seller's written obligation to deliver a distribution to the buyer when the timing of transfer agency processing prevents the buyer from receiving it directly.
When a Due-Bill Is Required
The classic fact pattern:
| Step | Event |
|---|---|
| 1 | Seller sells the security on a date that is before the security goes ex-distribution |
| 2 | Trade settles, but the transfer agent does not process the registration in time for the record date |
| 3 | The distribution (stock dividend, scrip dividend, or rights) goes to the registered owner of record (the seller, on the books) |
| 4 | The seller must remit the distribution to the buyer via a due-bill |
The due-bill is the seller's IOU for the distribution.
Due-Bill vs. Due-Bill Check
| Instrument | Distribution Type |
|---|---|
| Due-bill | Stock dividend, scrip dividend, or rights |
| Due-bill check | Cash dividend (a check payable on the date of payment), registered-bond interest, or UIT interest |
A due-bill check is a due-bill in the form of a check that becomes payable on the distribution payment date. It functions as an automatic payment mechanism.
Due-Bill Restrictions
A due-bill is not transferable or assignable by the purchaser. The buyer holds the due-bill and collects when the seller remits. The buyer cannot sell the due-bill to a third party.
Exam Tip: Gotchas
- A due-bill is required when a security is sold BEFORE going ex-distribution but transferred TOO LATE for the record date. The seller (registered owner of record) gets the distribution and must remit to the buyer via the due-bill.
- Due-bill = stock dividend, scrip dividend, or rights. Due-bill CHECK = cash dividend, registered-bond interest, UIT interest. The exam tests this distinction.
- A due-bill is NOT transferable or assignable by the purchaser. The buyer holds it and waits for the seller to remit.
Claims for Dividends, Rights, and Interest
If a buyer fails to have stock transferred in time to receive a dividend, rights distribution, or bond interest, the buyer may request the seller to collect the distribution on the buyer's behalf.
What the Seller Can Require
Before the seller pays the claim, the seller may require:
- The certificate or a transfer-agent letter substantiating the claim, OR
- The buyer's written statement that it (or its customer) was the holder on record date, AND
- A guarantee of indemnity
The guarantee of indemnity protects the seller against double-claiming (if the distribution was already remitted to someone else, the seller is held harmless).
What the Claims Rule Covers
The rule applies to:
- Dividends on stock
- Rights on stock
- Interest on registered bonds
- Interest on UIT securities
The mechanism mirrors the due-bill but applies after the distribution has occurred and the buyer is making a retrospective claim.
Exam Tip: Gotchas
- The claims rule lets the buyer claim a missed distribution through the seller. The seller (registered owner of record at the time of the distribution) holds the funds and remits to the buyer upon proper claim.
- The seller may require certificate proof OR a written statement plus an indemnity guarantee. Both paths exist; the seller chooses which to require.
Transfer Fees
The party at whose instance a transfer is made (i.e., the party requesting the transfer) pays the transfer agent's service charges.
This rule is deceptively simple but tested directly:
- The transfer fee is not automatically the seller's
- It is not automatically the buyer's
- It is the party who initiated the transfer
| Scenario | Who Initiates | Who Pays |
|---|---|---|
| Buyer wants the certificate registered in their name | Buyer | Buyer |
| Seller delivers a certificate that requires re-registration before deliverable form | Seller | Seller |
| Customer transfers an account from one broker to another | Customer | Customer |
| Firm reorganizes its book and consolidates customer positions | Firm | Firm |
Exam Tip: Gotchas
- The party AT WHOSE INSTANCE the transfer is made pays the transfer fee. Not seller, not buyer; the party who requested it.
- Transfer fees are NOT automatically split or assigned by trade type. The exam tests this with fact patterns where students assume the buyer pays (because the buyer becomes the new owner) but the rule looks at who initiated the transfer.
What Should You Check on Exam Day?
- Can you state which day-count convention applies to corporate bonds, 30/360, versus government securities, actual/actual?
- Do you know accrued interest is added up to but not including settlement date, and trade date for a cash trade?
- Can you distinguish a due-bill, stock dividend, scrip dividend, or rights, from a due-bill check, cash dividend or bond interest?
- Do you know that the party who initiates a transfer, not automatically the buyer or seller, pays the transfer agent's fee?