What is a bearer bond?
A bearer bond is a fixed income security that is owned by the holder or bearer, rather than by a registered owner. Coupons for payment of interest are physically attached to the collateral. The bondholder must send the coupons to a bank for payment and then redeem the physical certificate when the bond reaches its maturity date.
As with registered bonds, bearer bonds are negotiable instruments with a set maturity date and a coupon interest rate.
Bearer bonds are practically extinct in the US and some other countries, as lack of registration made them ideal for use in money laundering, tax evasion, and any number of other fraudulent transactions. They are also vulnerable to theft.
- The bearer bond is a physical certificate with attached coupons that are used to redeem interest payments.
- Since your property is not registered, the owner of a bearer bond is the person who owns it.
- Bearer bonds are as vulnerable as cash to theft or loss.
However, bearer bonds are still issued in many countries.
Understanding the bearer bond
In the US, bearer bonds were issued by the US government and corporations from the late 19th century to the second half of the 20th century. They gradually fell out of favor as they were outdated by modern technology, shunned by investors concerned about their vulnerability to loss or theft, and eventually outlawed by the government to thwart money laundering.
The modern system
Almost all securities are now issued in book entry form, which means that they are electronically registered in the name of the investor. No physical certificate is issued.
A registrar or transfer agent is responsible for tracking the name of each registered owner of a stock or bond. This ensures that bondholders receive all interest payments owed and that shareholders receive their dividends in cash or stocks.
Each time an account entry security is sold, a transfer agent or registrar changes the name of the registered owner. Obviously, this system is highly automated or it would collapse.
United States Policy on Bearer Bonds
The Fiscal Equity and Fiscal Responsibility Act of 1982 effectively ended the practice of issuing bearer bonds in the United States.
Bearer bonds are no longer issued by the US Treasury, and those issued in the past are long past their expiration dates.
Legal issues regarding bearer bonds
A person can buy any number of bearer bonds, submit coupons for payment, and remain anonymous, as the bonds are not registered in the owner’s name.
In 2009, multinational financial services company UBS paid $ 780 million and settled a deferred prosecution agreement with the US Department of Justice after the firm was accused of helping US citizens evade taxes using bearer bonds.
In the United States, bearer bonds were practically eliminated in 1982.
The lack of bond registration offers little protection or recourse to investors if the physical certificate is stolen, as the custodians do not have the name of the actual owner on file.
Bearer bonds can have nominal value
Old bearer bonds issued by corporations may or may not have retained their face value, even if the maturity dates have long expired.
A US law passed in 2010 exempted banks and brokerages from the responsibility of rescuing old bearer bonds.
The seeker of a corporate bearer bond can verify the name of the company that issued it and contact that company, if it still exists, or the company that bought it, if it was absorbed. The bearer’s guarantee can be honored.
Examples of bearer bond security problems
Most bearer bond owners keep physical certificates in a safe at a bank or in a safe at home. To redeem the voucher at maturity, the voucher must be delivered to a bank in person or by courier.
Getting interest payments is also problematic as coupons can get lost in the mail.
Bearer bonds can cause problems for the heirs of their owners. This can be avoided by attaching the proper documentation to the landlord’s will.