Bearer Bond

A bearer bond refers to the type of bond issued by a company, a corporation, or government for which there are no records maintained about the ownership of the instrument, and whoever has the custody of the instrument is the owner of the instrument.

In the process, the bond owners receive regular interest payments by delivering the coupons from the bond certificate to the ones paying that interest. These fixed-income securities are similar to traditional bonds with respect to having a maturity date and a coupon interest rate.

• Bearer bonds are fixed-income securities owned by whoever holds the physical bond certificate, providing anonymity and privacy to bondholders.
• Ownership of bearer bonds is transferred through physical possession, making them easily transferable and enhancing liquidity.
• Bearer bonds typically pay periodic interest to the bondholder. 
• The interest payments are made by presenting the bond coupon, which is attached to the certificate, to the issuer or agent. This feature ensures that bondholders receive regular income based on the bond terms.

Bearer bonds, also referred to as coupon bonds or sometimes unregistered bonds, are the ones that belong to the current possessor of the bonds. They do not have the name of the owner written just like a currency note. Hence, the interest and the coupon payments are made to the bearer of the instrument. These instruments became the main reprobate in illegal activities like tax evasion, money laundering, etc. because of which it has been prohibited in many states. The better version of bonds, as stated above, would be the registered bonds, which are more prevalent now.

These instruments became the main reprobate in illegal activities like tax evasion, money laundering, etc. because of which it has been prohibited in many states. The better version of bonds, as stated above, would be the registered bonds, which are more prevalent now. Bearer bonds are like our currency notes. The moment we hold it in our possession, it becomes ours. For instance, while walking on a road, if we find a dollar, we pick it up, and it becomes ours with no validation required. The same is with the case of a bearer bond. It belongs to whoever possesses it owns it.

Bearer bonds are bought and sold in the secondary market. However, the US market has now stopped facilitating such bonds’ deals. Some of the limitations that led to the extinction of these bonds include tax evasion, money laundering, exploitation by criminals, circumvention of law, concealment of business transactions, they are maintaining anonymity, tracing the rightful owner is almost impossible, and determining the owner is not possible.

Because of the limitations of the bearer bonds, securities are being issued in the book-entry form. That means the name of the owner is recorded electronically, with no physical certificate being issued. This cancels out the theft and misplacement limitations of the bearer bonds, ensuring that the actual owner receives the interest and dividend payments.

Let us consider the following instances to understand the bearer bond definition better:

Example #1

Say, Mr. K buys a $100 bearer bond of the Company ABC. The coupon rate on such bonds is 8%. ABC has to pay Mr. K an interest of 8% ($100 X 8%) on the face value of the bond. For receiving this interest amount, Mr. K has to untie the particular coupon from his instrument and present it to the agent of the company or the banker, as the case may be.

Even when the bond trades at an amount higher or lower than $100, the coupon payment will remain unaffected.

Example #2

In May 2023, a report was published that covered an announcement from Louisiana Treasurer that talked about a 17-year-old bearer bonds document recovered during the Hurricane Katrina in 2005 that was still unclaimed. The cash value of the old financial instrument was worth $250,000. The announcement asked people to connect with the authorities to claim for before it was disposed of because of being unclaimed by its bearer or holder.

The example above indicates how these bonds can still be redeemed irrespective of what time they belong to.

Bearer bonds are financial instruments that offer easy transferability as there is no registered owner associated with them. It becomes an ownership of the one it is currently held by. Besides this, there are other benefits of these bonds that have been mentioned below:

• Like any other fixed-income instrument, money raised by the issue of the bearer bonds is used to fund the growth and operations of the enterprises, government.
• The interest payments are periodical. The coupons submitted to the agent or the banker are acknowledged immediately, and payment is made.
• The principal amount of the bond is received promptly as of the date of maturity.
• They are easily transferable.
• Anonymity can be maintained.

Apart from the above advantages that holding these bonds offer, there are multiple demerits as well that people must be aware of as these are the reasons that have made bearer bonds losing relevance and becoming extinct in the US financial market. Let us have a look at some of them:

• When there is a loss due to theft, destruction, etc. of the bond, it is almost impossible to recover it because the actual owners do not get their name registered on it. There is no recourse available in such cases.
• In case of the death of the owner of the bonds who has kept their bonds in some secretive location, the legal heirs would not be able to find the physical location of the certificates.
• Such bonds have been used for illegal causes such as money laundering, anonymous and unaccounted business transactions, tax evasion, etc. Because of these reasons, the Tax Equity and Fiscal Responsibility Act, 1982, has brought an end to the issue of these instruments in the United States of America. Along the same lines, many other economies have discouraged these bonds because of the illegal activities being carried on with the help of such instruments.

This has been a guide to what is Bearer Bond. Here, we compare it with registered bond and explain its examples, advantages, and disadvantages. You can learn more about valuation from the following articles –

• Serial Bond
• Premium Bonds
• Corporate Bonds Types
• Surety Bond