Bearer bonds

3 key takeaways

• Bearer bonds are owned by whoever physically holds them, offering anonymity and ease of transfer.
• They typically pay interest through attached coupons that can be redeemed by the bearer.
• Bearer bonds are less common today due to regulatory concerns and the potential for misuse.

What are bearer bonds?

Bearer bonds are debt securities that differ from registered bonds in that they are owned by whoever possesses them. Unlike registered bonds, which have the owner’s name recorded and interest payments sent directly to the registered owner, bearer bonds have no such record. The physical possession of the bond is the sole evidence of ownership.

Key features of bearer bonds

1. Anonymity: The owner’s name is not recorded, providing complete anonymity for the bondholder.
2. Physical possession: Ownership is determined by physical possession of the bond certificate.
3. Interest payments: Bearer bonds often come with detachable coupons. To collect interest, the bondholder redeems these coupons, typically at a bank or financial institution.
4. Transferability: These bonds can be easily transferred by handing them over to another person, much like cash.

How do bearer bonds work?

1. Issuance: An entity (such as a corporation or government) issues bearer bonds, which are purchased by investors.
2. Physical certificates: Investors receive physical bond certificates, which they must keep secure to maintain ownership.
3. Coupon payments: Attached to the bond certificates are coupons representing interest payments. The bondholder detaches and redeems these coupons at designated intervals (e.g., semi-annually) to receive interest.
4. Maturity: Upon maturity, the bondholder redeems the principal amount by presenting the physical bond certificate to the issuer or paying agent.

Examples of bearer bonds usage

1. Historical use

• Privacy and anonymity: In the past, bearer bonds were popular because they provided a high degree of privacy and anonymity. Investors who wanted to keep their identities and investments private often preferred bearer bonds.
• Ease of transfer: Bearer bonds were easily transferable between parties. The transfer involved physically handing over the bond certificate, making it simple to buy and sell without the need for formal registration.

2. Modern-day decline

• Regulatory concerns: Due to concerns about money laundering, tax evasion, and fraud, bearer bonds have become less common. Regulations have made issuing and holding bearer bonds more challenging.
• Electronic securities: The shift to electronic securities and registered bonds has reduced the use of physical bearer bonds, as electronic systems offer greater security and traceability.

Importance of bearer bonds

• Anonymity and privacy: Bearer bonds offer complete anonymity for the holder, making them attractive for investors seeking privacy.
• Ease of transfer: The ability to transfer ownership by simply handing over the physical certificate made bearer bonds convenient for transactions.
• Historical significance: Bearer bonds played a significant role in the financial markets before the advent of modern regulations and electronic securities.

Real-world application

Example: An investor in the early 20th century buys a $1,000 bearer bond with a 5% annual interest rate and a 10-year maturity.

Physical possession: The investor receives a physical bond certificate with detachable coupons representing the interest payments.

Interest payments: Every six months, the investor detaches a coupon and redeems it at a bank to receive $25 in interest.

Transferability: If the investor decides to sell the bond, they can simply hand over the physical certificate to the buyer, who then becomes the new owner.

Maturity: After 10 years, the bond matures. The current holder presents the bond