Bearer Bond – Definition, Meaning, Pros and Cons

July 10, 2021 By Hitesh Bhasin Tagged With: Finance

Bearer Bond is an unregistered debt security issued by a government or a corporation. It is an anonymous instrument because it is difficult to identify its true owner if it gets lost, as the certificate does not contain the details of the holder’s profile. In other words, whosoever has the physical structure of the bond becomes its owner. This also implies that the interest and the principal amount for the instrument become due to the one who physically possesses it.

The bearer bond can also be understood as a physical certificate with coupons attached that are used for redeeming interest payments. The owner of such a bond is the person who possesses it, as bearer bonds ownerships are not registered. Such bonds are as vulnerable to lose or theft as cash.

Table of Contents

What is a Bearer Bond?

Definition: A bearer bond is defined as an unregistered bond or debt security that a corporation or government issues with no records of the owners. It is a bearer instrument that is considered good for those investors who want to retain anonymity.

A bearer bond is a fixed-income instrument that is not registered to a holder and maintains complete anonymity. Since no records of the owner are maintained, whosoever has custody of the physical bond becomes its presumptive owner.

Understanding Bearer Bond

Bearer bonds – also called coupon bonds – have no registered owner and they come up with a stated maturity date and attached coupons for the redemption of interest payments.

These negotiable instruments are highly vulnerable to theft or loss as the true owner’s identity remains unknown. They were first used on a massive scale in the late 1800s in the United States when government resources became scarce.

As a result, they were issued to fund Reconstruction during the Civil War. Soon after that, bearer bonds gained traction in Europe and South America too. However, as of May 2016, all the bearer bonds issued by the US Treasury have matured.

How Do Bearer Bonds Work?

The money is lent to the issuer whenever a person buys the bond, and the payment is made in the following ways, assuming there is no default:

1. Principal Amount

The buyer receives the original investment on the maturity date and redeems the bond by submitting the physical paper of the bond. Sometimes, there is early redemption which happens when bonds get called before they are matured.

2. Interest Payments

Coupons for interest payments are attached to the bearer bonds, which need to be clipped and submitted to collect the payments.

Advantages of Bearer Bonds

Bearer bonds can prove to be beneficial because of the following:

• They can be transferred from one person to another without any trouble
• Their anonymity because of not being a registered bond makes them appealing to the public.
• They have periodical interest payments that immediately get acknowledged by the agent, and the payment is made immediately.
• Even the principal amount is received immediately as of the maturity date.
• Bearer bonds are negotiable debt instruments issued to raise money that organizations or governments can further use to finance their growth and operations.

Disadvantages of Bearer Bonds

Bearer bonds are infamous for the following reasons

• One of the primary reasons as to why these bonds have lost their essence is that they fail to identify the actual owner of the bond on the face of it. So, whenever there is any loss because of theft or destruction, it becomes virtually impossible to restore them to the rightful beneficiary.
• Suppose the issuer defaults on the interest and principal payments. In that case, the investors could call for legal action to be taken, and they were required to surrender the anonymity of their ownership.
• The US Treasury does not allow these bonds to be issued because there had been many cases where these bonds were used illegally. The rising instances of money laundering, tax evasion, and several other illegal and anonymous business transactions have made many other economies put an end to these instruments as well. Investors can use these bonds to transfer their black money and bring it back into the economy via genuine contact.
• It becomes difficult for the legal heirs to locate the bond certificates if they have been kept away from them in a secret place. The death of the true owner in such a scenario makes it almost impossible to trace the place.

Bearer Bonds vs. Registered Bonds

The following arguments make bearer bonds different from a registered bond

• The person who has the bearer bond gets the payment of interest, whereas, in the case of registered bonds, the true beneficiary is the rightful owner of the interest.
• Bearer bonds are easily transferable because they do not contain the owner’s details, but a registered bond can’t be transferred unless they are issued in the new owner’s name.
• There is no provision for keeping and tracking the payment records in the case of bearer bonds; however, the agent needs to maintain payment records for a registered bond.
• Bearer bonds are risky because they are vulnerable to forgery or theft, which is not the case with a registered bond as they account for little or no risk at all.

Criminal Usages and Risks of Bearer Bonds

Bearer bonds are one of the most popular financial instruments used for money laundering, tax-evading, and other criminal activities associated with concealing business transactions.

Using bearer bonds for dodging taxes also became quite more popular after World War I. They were quite preferably used for illegal purposes until the Tax Equity and Fiscal Responsibility Act of 1982 that outlawed the new issuance of bearer bonds in the US.

Some of the risks associated with a bearer bond are-

• Tax evasion
• Exploitation by criminals
• Money laundering
• Circumvention of law
• They are maintaining anonymity
• Concealment of business transactions
• Determining the owner is not possible
• Tracing the rightful owner is almost impossible

Is Bearer Bond legal anywhere?

Use of the bearer bonds is virtually extinct in the U.S. and many other countries around the world.

The lack of registration in bearer bonds has made them ideal for use in tax evasion, money laundering, and any number of other under-handed monetary transactions.

Conclusion

On the concluding note, it is clear that bearer bonds are unregistered bonds and they belong to their current possessor.