U.S. Treasury Coupon Entitlement When Settlement Falls on a Coupon Date
Summary
The document addresses who receives a U.S. Treasury coupon when a bond trade settles on the coupon payment date. It describes the market convention: the seller receives that day’s coupon, and the buyer’s invoice price equals the quoted price without accrued interest. The buyer is entitled to later coupon payments, including any portion due if the bond is subsequently sold before the next payment date.
The answer illustrates the convention with a historical analogy in which the seller collects the coupon before delivering the bond. It emphasizes entitlement by settlement convention rather than the time of day the payment or settlement occurs. A second response in the source gives the opposite conclusion for a purchase agreed before the coupon date, so the discussion contains conflicting claims; the accepted answer’s rule is specifically framed for U.S. Treasury bonds. The document cautions that UK conventions may be more complicated, and it does not establish rules for every bond market or security type.
Key ideas
- For U.S. Treasury bonds settling on a coupon date, the seller receives that day’s coupon under the stated convention.
- The buyer’s invoice price on that settlement date excludes accrued interest.
- The buyer is entitled to subsequent coupon payments while holding the bond.
- The discussion’s rule is market-specific and notes that UK treatment can differ.
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Full text
# What is the price of a bond that settles on its coupon date? # What is the price of a bond that settles on its coupon date? Let's say I have a bond that pays on coupon on 10/03. I buy this bond on 10/01 with settlement on 10/03. Who gets the coupon ? Does it depend if it's paid in the morning, in the afternoon, before/after the settlement ? Or is there a market convention that clarifies this kind of situation ? ## Answer by nbbo2 (score 5, accepted) https://quant.stackexchange.com/a/49719 Yes, of course there is a market convention. We can try to imagine how this worked in the 19th Century. The bond belongs to Mr. S, a wealthy capitalist. On 10/03 Mr. S is legally entitled to receive a coupon payment. So the first thing he does (of course) is he goes down to the US Treasury office on Wall Street, and shows the bond. The clerk "clips" (cuts out) the coupon from the bond, returns the bond to the owner (after stamping "coupon paid 10/03/1819" on the back) and gives the coupon payment in cash to Mr. S. Having enforced his right Mr. S now has to live up to his obligation: he sold the bond to J.P. Morgan recently and is now (10/03) obligated to settle the sale. So he takes the bond (what's left of it, i.e. without the coupon) over to the offices of J.P. Morgan across the street. There he gives the bond and receives the price that was agreed. (Mr. Morgan, the buyer, is not surprised that the coupon is missing, he would have done exactly the same thing) The modern convention is similar: when the bond settles on the coupon date, the coupon is paid to the seller, and the invoice price is equal to the quoted price (i.e. there is no accrued interest). The buyer is entitle to the next coupon (all of it or a part, if he sells it early) but not today's coupon. (This is for US Treasury Bonds, in the UK it is more complicated). ## Answer by VanillaCall (score 0) https://quant.stackexchange.com/a/49897 Since the bond was purchased on 10/1 and settles on 10/3, the coupon belongs to the buyer of the bond. The reason why is because when someone buys the bond on 10/1, they receive the price + accrued interest up to 10/1 and nothing more.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.