Follow me on Blogarama

What happens when a bond matures?

What happens when a bond matures?What happens when a bond matures?

If you own bonds you already know that when it comes due (matures) you are supposed to get your money back. The question is, how does that happen? You might think this is a straight forward process – and it can be. But it depends on how you hold the bonds.

That’s because there are two ways to hold bonds. What most people do is they buy their bonds through a broker and keep the bonds in their account. (This is by far the best way to do and I’ll explain why in just a minute.)

If you keep your bonds in your account there is no actual bond certificate (also a very good thing and also something I’ll get to). The bonds are just an entry in your account at the brokerage firm and when they come due the bonds are swept out of your account and the cash is put in. Simplisimo.

Now let’s talk about the second way to hold bonds; by getting a certificate issued to you and putting it somewhere “safe”. In the by-gone days, this was the only way to hold a bond investment; you had to get a physical certificate and keep it as safe as possible. As soon as brokerage firms started keeping track of securities electronically, investors no longer had to hold on to their certificates. Still some people just liked the “security” of having that piece of paper in their hands rather than having an electronic notation on a statement and computer screen.

If you have the physical certificate and the bond matures, you have to send it in to what’s called a bondstransfer agent in order to get your money. A transfer agent is sort of an intermediary between yourself and issuer of the bond. These are usually banks or trust companies. Once in a while a company acts as its own transfer agent but that atypical.

So, for example, if you own a GE bond, and the bond matures, you send it to the transfer agent and they get you the cash for from GE. It sounds simple but it’s really not. Here’s why.

Chances are high that the transfer agent won’t reach out to you when the bond comes due. It will be your responsibility to contact them, send them your certificate and then get your money. If you aren’t proactive, the transfer agent and the issuer won’t mind. They’ll just stop paying you interest of course and will hold on to your money without compensating you until you connect with the transfer agent.
As you can guess, this is one of the main reasons why I strongly encourage you not to hold on to bond or stock certificates but to deposit them in a brokerage account. That way, when the bond comes due, the brokerage will immediately take care of the redemption for you without you having to lift a finger.

Another reason why I encourage everyone to deposit securities with a broker is that it is far safer this way. In short, if you have securities on deposit with a broker, they can’t get lost. But if you keep certificates in your possession and lose them, you could be charged 3% or more by the transfer agent to replace them – and that’s after a very lengthy and paper-work heavy process.

Bottom line? When a bond comes due and it’s in your brokerage account, you don’t have to do a thing. The broker will take care of everything. All you’ll have to do is figure out how to reinvest the proceeds. If you have a physical certificate the process is more complicated and dangerous. That’s why if you currently have physical possession of certificates, you might consider depositing them in a brokerage account.

Do you have bond certificates? Have you had to deal with redeeming them through a transfer agent? What was that like?

Be the first to comment on "What happens when a bond matures?"

Leave a comment

Your email address will not be published.