A registered bond is a type of bond whose ownership (both principal and interest) is recorded on the books of the issuing company or its registrar. This contrasts with bearer bonds, which are not registered and the issuer does not keep a record of the bondholder’s name. With registered bonds, only the person or entity listed in the issuer’s records can claim the bond’s principal and interest payments.
Key features of registered bonds include:
- Transfer of Ownership: To transfer the ownership of a registered bond, the bondholder must endorse the bond and notify the issuer or its transfer agent. This ensures that a clear record of ownership is maintained.
- Payment: Interest payments are sent directly to the bondholder of record, typically through a check or electronic transfer, eliminating the need for clipping coupons (as was common with older bearer bonds).
- Lost or Stolen Bonds: In the event a registered bond certificate is lost or stolen, it can be replaced since the issuer has a record of the bondholder. This offers a layer of security that bearer bonds lack.
- Tax Reporting: Because the issuer maintains records of ownership for registered bonds, they can report interest payments to tax authorities. This makes tax compliance more straightforward for both the issuer and the bondholder.
Registered bonds have become the standard in the bond market, primarily due to the security advantages they offer over bearer bonds. Bearer bonds, which simply pay interest to whoever holds the physical bond certificate (and therefore require no registration), have largely fallen out of favor due to concerns about tax evasion, money laundering, and other illicit activities.
Example of a Registered Bond
Let’s delve into a hypothetical example involving a registered bond.
XYZ Corporation, a large infrastructure company, wants to raise capital for a new highway project. After considering various financing options, they decide to issue bonds. Given the prevailing market conditions and their credit rating, they settle on issuing a 5-year registered bond with a 4% annual interest rate.
- XYZ Corporation announces its intention to issue the bond and provides all relevant details, including the bond’s maturity, interest rate, and the fact that it’s a registered bond.
- John, an individual investor, is interested in this bond. He decides to buy $10,000 worth of XYZ Corporation’s bond.
- John’s purchase is recorded by XYZ Corporation (or by a designated registrar or transfer agent). His name, contact details, and the amount of bond he holds are all registered.
Because it’s a registered bond, XYZ Corporation knows exactly who holds its bonds and in what amounts. Every year for the next 5 years:
- XYZ Corporation will send John an interest payment of 4% on his $10,000 investment, which is $400. This payment is directly deposited into John’s bank account.
- XYZ Corporation also reports these interest payments to the tax authorities, ensuring transparency and adherence to tax regulations.
At the end of the 5-year term:
- John receives his original $10,000 back from XYZ Corporation.
- If he had decided to sell the bond before maturity, he would’ve had to notify the registrar to ensure the bond’s ownership records were updated.
Two years into the bond term, John realizes he misplaced his bond certificate. However, since it’s a registered bond, after verifying his identity, XYZ Corporation (or the registrar) can issue him a replacement, ensuring he doesn’t lose his investment.
This example underscores the convenience and security that registered bonds offer to both issuers and bondholders. The issuer has a clear record of bondholders, and bondholders don’t have to worry about losing their investment if they misplace their physical certificate.