Bonds traded ex-coupon transfer ownership without the right to the next scheduled coupon payment. In practice the seller retains entitlement to that upcoming coupon and therefore effectively keeps the accrued interest that builds up to the coupon date. This allocation follows standard settlement and market conventions described in fixed income literature by John C. Hull University of Toronto and by major market authorities, which treat an ex-coupon trade as a trade that excludes the next coupon cash flow from the buyer’s rights.
Entitlement and payment flow
When a bond transaction occurs under normal circumstances the buyer pays the seller a clean price plus accrued interest that compensates the seller for interest earned since the last coupon. In contrast an ex-coupon trade alters that economic transfer. The clean price is adjusted downward to reflect exclusion of the next coupon and the seller continues to receive the coupon when it is paid. From a cash flow perspective the seller receives the coupon on the payment date and keeps the interest accrued up to that date while the buyer accepts the bond without that imminent coupon. Fixed income textbooks and market practice guides explain this as a mechanism to align legal record dates with trading and settlement cycles.
Causes and consequences
Ex-coupon status arises because of timing between trade date settlement and the coupon record date and because market conventions aim to prevent double entitlement to the same coupon. The consequence for market participants includes short-term pricing differences and potential tax or accounting effects for buyers and sellers. For example the seller may realize taxable income from the coupon receipt even though the economic transfer of the bond has occurred, while the buyer starts earning interest only after the coupon date. Market customs and legal frameworks vary across jurisdictions so the exact operational details differ between corporate bond markets in different countries.
Understanding which party bears accrued interest in ex-coupon trades matters for portfolio managers, dealers, and corporate treasurers who must reconcile cash flows, enforce settlement instructions, and manage short-term liquidity. The allocation of coupon and accrued interest also affects secondary market liquidity and pricing transparency, particularly in markets where ex-coupon periods are frequent or where tax regimes treat coupon receipts differently for residents and non-residents.