Governments and corporations have issued bearer bonds for several centuries, but they have become less popular in recent years. For example, bearer bonds were used extensively to finance the Civil War. However, changes in modern technology, the possibility of loss or theft and restrictions by government regulations have decreased their usage.
What Is a Bearer Bond?
A bearer bond is a debt instrument issued by a corporation or a government that pays a fixed interest rate. However, unlike registered bonds, a bearer bond does not have any type of registration, explains the Cornell Law School Legal Information Institute.
No records are maintained as to the ownership of the bond. Therefore, whoever possesses the physical certificate is considered the owner. There are no records regarding when the bond is bought and sold, and there are no records regarding who is receiving the interest payments.
How Bearer Bonds Work
A bearer bond is a fixed-income security that pays interest until its final maturity date. They have coupon payments physically attached to the bond certificate itself. To collect the interest payments, the bondholder must clip the coupons and send them to the bond issuer for payment. The bond can be presented to the issuer at its maturity date for full redemption to receive the face value of the bond.
Value of a Bearer Bond
If the issuer of the bearer bond is still in existence, the marketable value of the bond will depend on its coupon interest rates and the rates in the current market. The value of the bond will also be adjusted to the perceived risk that the issuer will remain solvent and continue to be able to pay the interest on the bonds. Otherwise, the marketable value of such bonds may only exist to the extent of interest from hobbyists and collectors.
Security Issues With Bearer Bonds
Bearer bonds have more risks than registered bonds because they are not registered, and no records are kept of any transactions. Such security issues include:
- Loss or theft: Since bearer bonds are almost like cash, there are no records to recover your investment if you lose the bond. If the bonds are destroyed in a natural disaster, such as a fire or a flood, there is also no way to recover their value. The same problem applies to theft. In addition, if the coupons are lost in the mail, you have no way to recover the interest payments without records.
- Tax evasion: Individuals who wish to evade taxes like to purchase bearer bonds because the IRS is not notified about any interest that is paid. Without registration, these individuals can avoid taxes by not reporting their income.
- Money laundering: Bearer bonds have been used by criminals for money laundering because of their anonymity. As a result, the government has issued more regulations that severely limit the use of bearer bonds.
- Forgery: Just like counterfeit money, forgers can print fake bearer bonds and sell them to gullible individuals by passing them off as a legitimate debt security.
The safest way to protect your bearer bonds is to store them in a secure location, like a safe deposit box at a bank, just as you would with large amounts of cash.
U.S. Regulations Restrict Use of Bearer Bonds
For all practical purposes, the U.S. government effectively ended the use of bearer bonds by U.S. citizens with the passage of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA eliminated the tax benefits of bearer bonds and set up penalties for anyone using them. Even with these obstacles, U.S. issuers could still market bearer bonds to foreign investors for a while, but Congress has passed additional legislation that restricts this usage even further.
- If the bearer bond can't be redeemed, it may have value as a collectible. The hobby of collecting antique stocks and bonds is called scripophily and these collectors could help you determine if the expired bearer bond has value.
- Because bearer bonds can be redeemed by anyone who owns them, they can be risky. Similar to cash, bearer bonds are vulnerable to theft and damage.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.