In the review section of the common stock chapter, we learned that trades take time to settle. When an investor buys or sells a bond, several behind-the-scenes steps must happen to make sure ownership records are updated correctly.
For the issuer to pay interest to the right investor, it needs an accurate record of who currently owns its bonds. Similar to common stock, the transfer agent keeps these ownership records and handles interest payments. The issuer provides the funds to the transfer agent, and the transfer agent distributes the payments to the current bondholders.
As trades occur, the transfer agent updates its bondholder records. Changing a bond’s ownership from the seller to the buyer takes one business day.
We haven’t discussed specific bond issuers yet, but there are three major categories: US Government, municipal, and corporate. Later, you’ll look at each category and the types of bonds they issue. For now, focus on the general settlement times:
US Government bonds
Municipal and corporate bonds
There are exceptions to these settlement times depending on the specific bond and how the trade is executed, but the Series 7 typically tests these general rules.
You may be asked which system these trades clear through, but you won’t need to know much beyond the names. Municipal and corporate trades settle through the Clearing House system (the same system used for many everyday banking transactions). US Government trades settle through the Federal Funds system.
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