When an entity, such as a state or local government, issues bonds, hundreds or thousands of investors may buy and hold the bonds at any given time. Rather than keeping track of various interest and principal payments to each individual investor, the issuer generally uses a paying agent.
When principal and interest is due, the issuer sends the total amount of money to make the payments to the paying agent. The paying agent, often a trust company or a trust division of a bank, then arranges for the proper interest and principal payment to be transmitted to each investor. If the bonds are sold in certificated, and not book-entry only, form, the agent “issues” new bond certificates when ownership is transferred prior to maturity.
In practice, the paying agent may provide multiple services for the investor
- the bond trustee often serves as paying agent
- the registrar keeping the list of bondholders
- the transfer agent transferring ownership of each bond when it is bought and sold.