A bearer bond is a type of fixed-income security that does not have a registered owner. Instead, the bond’s ownership is determined by whoever physically possesses the bond certificate. The issuer of the bearer bond does not keep any records of the bond’s ownership, and interest payments or principal repayments are made to the person who presents the bond for payment.
Bearer bonds were once popular because they provided anonymity to the bondholder, and they could be easily transferred from one person to another without any formal registration process. Interest payments on bearer bonds were typically made by clipping a coupon attached to the bond certificate and redeeming it for the interest payment.
However, due to concerns about tax evasion, money laundering, and other illicit activities, the issuance of bearer bonds has been largely discontinued in most countries. In the United States, for example, the issuance of bearer bonds was banned in 1982, and existing bearer bonds have become increasingly rare as they reach maturity or are called by the issuer.
Today, most bonds are registered securities, where the ownership of the bond is recorded and maintained by the issuer or a central registry, and interest payments are made directly to the registered owner. This system provides greater transparency and makes it more difficult to use bonds for illicit purposes.
Example of a Bearer Bond
Let’s consider a fictional example of a bearer bond issued by XYZ Corporation. In this example, XYZ Corporation issues a 10-year bearer bond with a face value of $1,000 and an annual interest rate of 5%.
The bond certificate has 10 detachable interest coupons, each representing the annual interest payment of $50 ($1,000 face value x 5% interest rate). The bondholder would clip and redeem one coupon each year to receive the interest payment. At the end of the 10-year term, the bondholder would present the bond certificate itself to XYZ Corporation to receive the $1,000 face value.
Suppose an investor, Jane, buys the bearer bond at issuance. She holds onto the bond for five years, collecting the annual interest payments. Then she decides to sell the bond to another investor, John. Jane simply hands over the physical bond certificate with the remaining five coupons to John, and the transfer of ownership is complete. There is no formal registration process or record of the transfer.
John holds the bond for the remaining five years and collects the annual interest payments. At the end of the 10-year term, he presents the bond certificate to XYZ Corporation and receives the $1,000 face value.
This example illustrates the anonymity and ease of transfer of bearer bonds. However, it’s important to note that bearer bonds are largely obsolete today due to the concerns about tax evasion, money laundering, and other illicit activities associated with their anonymous nature.