Buying Bearer Bonds

Buying Bearer Bonds
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Although the issuance of new bearer bonds ended in 1982, you can probably still find bonds for sale through a private seller. In the United States, these bonds largely persist as historical relics collected by museums and history enthusiasts. Bearer bonds are still available for investing, just not domestically.

What Is a Bearer Bond?

Bearer bonds, or bearer debt securities, are debt instruments owned by the possessor of the bond according to the Cambridge English Dictionary. They operate like other fixed-income securities with the difference of being owned outright by whoever holds the physical certificate. The U.S. government discontinued issuing such bonds in ‌1982‌ due to changing laws around registered owners and transparency to reduce fraud and money laundering.

Unlike other types of bonds, where ownership is registered, bearer bonds were issued as physical certificates and could be redeemed by anyone possessing them with no reporting to the IRS. Interest payments for bearer bonds were entirely anonymous. As negotiable instruments, they were easily bought, sold or even stolen.

They were coupon bonds, with coupons attached to the bond that had to be mailed in by the bondholder. The bond owner’s name was entirely unknown, offering total anonymity as to who was receiving the payment. This fact was not lost on criminals. The use of bearer bonds was often for illegal activities, such as tax evasion.

Domestic Examples of Bearer Bonds

During the Civil War, there was a spike in bond issuance. The Confederacy especially lacked resources after secession and set forth issuing bonds when taxation and tariffs were not possible, according to the Virginia Department of Historic Resources. Anonymous coupon payments were far less concerning than generating the necessary capital to finance a war.

Most Confederate-issued bonds were bearer bonds aiming to generate ‌15 million‌ ‌dollars‌, with maturity dates between three and 30 years. The face value of most of these bonds was between ‌$100‌ and ‌$1,000‌, but a precious few were as high as ‌$100,000‌. Initially, these Confederate bearer bonds offered a very attractive ‌eight percent‌ interest rate, as the Confederate Congress was quite optimistic early in the war. As time passed, that percentage rate would decline to lows reaching ‌three‌ or ‌four percent‌.

Congress finally prohibited the issuance of any new bearer bonds as a result of the Tax Equity and Fiscal Responsibility Act of 1982. Bearer bonds were too easily used for fraudulent activities. Today, the U.S. Treasury only issues registered bonds electronically, and the bondholder is known to the issuer, with proceeds reported to the IRS. Bearer bonds are pretty much extinct by now in the United States, but some certificates are considered collectible for their historical value.

Which Countries Sell Bearer Bonds?

These days, bearer securities are often regarded in association with offshore accounts and the private sector because they must be purchased from sources outside the United States. Eurobonds are often issued in a bearer format, according to Nasdaq. These are bonds issued in a currency other than the issuing country's currency and can be purchased through a brokerage.

Eurodollar bonds are denominated in U.S. dollars that are held overseas. These bonds may be in dollars but are not regulated by the U.S. government, which some buyers find attractive. Exercise due diligence in researching the issuer, as fraud is a real concern.

In general, owning bearer bonds can carry risks because of their similarities to cash. If lost, stolen or damaged, there is no way to replace them. Most of the anonymity that bearer bonds once offered is now gone. Holders can redeem these bonds but must identify themselves and pay any taxes owed on bond income.