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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 ?

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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).

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    $\begingroup$ When does the seller actually receive the cash? $\endgroup$ Nov 14 '19 at 19:45
  • $\begingroup$ The seller receives cash on 10/3 via Fedwire frbservices.org/financial-services/securities/index.html which provides immediately spendable funds, as good as dollar bills but in much larger amounts $\endgroup$
    – noob2
    Nov 15 '19 at 21:52
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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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