Settlement

In the review section of the common stock chapter, we learned how trades take time to settle. When an investor buys or sells a bond in the market, actions must be taken behind the scenes to properly reflect the new ownership.

In order for the issuer to make interest payments to the right investor, it must know who its current bondholders are. Similar to common stock, the transfer agent is responsible for making interest payments to bondholders when they’re due. They are provided the funds from the issuer, then distribute them to the current bondholders.

The transfer agent continually updates their book of bondholders when trades occur. Changing a bond’s ownership from the seller to the buyer takes one business day.

We haven’t discussed the specific bond issuers, but there are three big categories: US Government, municipal, and corporate. In future sections, we’ll talk about each separately and the types of bonds they issue. For now, we need to be comfortable with their settlement times:

US Government bonds

• Settle one business day after trade (T+1)
• Settles through the Federal Funds system

Municipal and corporate bonds

• Settle one business days after trade (T+1)
• Settles through the Clearing House system

There are some exceptions to these settlement times depending on the specific type of bond and how the trade is accomplished, but the Series 7 usually sticks to these generalities.

You may be asked through what system these trades clear, but you won’t need to know much beyond their name. Municipal and corporate trades settle through the Clearing House system, which is also the system you utilize for your personal banking. US Government trades settle through the Federal Funds system.