Bond Settlement: Accrued Interest, Due-Bills, Claims, and Transfer Fees
Quick Answer
The Uniform Practice Code computes accrued interest on the 30/360 day-count for corporate and municipal bonds, added to the dollar price up to but not including the settlement date (or trade date for cash trades). It governs due-bills (a seller's obligation to remit a distribution to the buyer when the security was sold before going ex-distribution but transferred too late for the record date) and due-bill checks (the same concept for cash dividends). A buyer who failed to receive a distribution can claim it through the seller. The party at whose instance a transfer is made (the party requesting it) pays the transfer agent's service charges.
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
Accrued interest is the interest that has accumulated on the bond from the last coupon payment date up to but not including the settlement date. The buyer pays the seller for this accrued interest because the buyer will receive the next full coupon payment on the next coupon date.
Day-Count Convention
The standard convention for corporate and municipal 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 and municipal issues.
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 and municipal bonds use 30/360 day count; government securities use actual/actual. The exam will give a bond type and ask which convention applies.
- Accrued interest is added up to BUT NOT INCLUDING the settlement date. Settlement-date interest belongs to the buyer (who will receive the next full coupon).
- 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.