Definition
A bearer bond is a type of fixed-income security that is unregistered with no record of the owner or the transactions involving ownership. Whoever holds the physical paper of the bond is considered the owner, hence the term “bearer”. This type of bond allows investors to remain anonymous but also makes the bond susceptible to theft since whoever possesses it is its legal owner.
Key Takeaways
- A Bearer Bond is a type of fixed-income security that is owned by the holder or bearer, rather than a registered owner. They function much like cash because whoever physically holds the paper on which the bond is issued owns the asset.
- Unlike other bonds, Bearer Bonds don’t carry any information about the owner or purchaser, maintaining the anonymity of ownership. This has often resulted in issues related to tax evasion and money laundering.
- Due to these risks and challenges, Bearer Bonds have been largely phased out and are no longer issued by the U.S and many other countries, making them quite rare in modern finance.
Importance
The finance term “Bearer Bond” is important because it represents a unique style of fixed income security.
Unlike registered notes that document the name of the bondholder and require a record of any transactions, bearer bonds are unregistered and grant ownership to whoever physically holds the paper.
This feature made them highly convenient for transactions and a favorite among investors who prefer to remain anonymous.
However, due to concerns over tax evasion and money laundering, these bonds are almost completely phased out in many countries.
Nevertheless, understanding bearer bonds aids in comprehensive knowledge of historical and worldwide practices in the bond market.
Explanation
A bearer bond serves the vital purpose of providing individuals or entities with an instrument through which they can raise funds for varying purposes. This type of bond doesn’t have the owner’s name recorded and is consequently owned by whoever possesses it physically, hence the name ‘bearer’ bond.
The bond provides a way for investors to loan money to the issuer in exchange for regular interest payments, usually semi-annually, and the return of the principal amount at maturity. Typical issuers of these bonds range from governments to corporations seeking to fund operations, infrastructure projects, or other capital needs.
From the perspective of an investor, bearer bonds offer a means of passive income through interest coupled with relatively low risk compared to equity investments, assuming the issuer is creditworthy. As its ownership is determined by possession rather than registration, this kind of bond allows for ease of transfer and anonymity, making it appealing for privacy-oriented investors.
However, due to the potential misuse for tax evasion or money laundering, they’ve been largely phased out in many jurisdictions, replaced by registered bonds where ownership is clearly declared and tracked.
Examples of Bearer Bond
U.S. Treasury Bonds: The U.S. government once issued bearer bonds to finance major government projects. These bonds were registered only according to their physical possession. Holders of these bonds would detach coupons attached to the bonds and present them for interest payments.
Zero-coupon Bearer Bonds: In the 1980s, some corporations issued zero-coupon bearer bonds, which do not pay periodic interest. Here, the difference between the discounted issue price and the face value is the return to the bond’s holder.
Eurobonds: Some foreign countries, especially those in Europe, continue to issue bearer bonds, commonly known as Eurobonds. These bonds are issued outside the jurisdiction of any single country, are denominated in a currency not native to the issuer’s home country, and they do not require holders to register their ownership.Please note that due to changes in laws and regulations, bearer bonds have largely fallen out of use. The U.S., for instance, stopped issuing them in 1982, as they were often associated with tax evasion or money laundering due to their lack of ownership tracking.
FAQs About Bearer Bond
What is a Bearer Bond?
A Bearer Bond is a type of fixed-income security that is owned by the holder (bearer), rather than registered to a specific owner. The bond does not have a paper record of the holder’s identity. Rather, payment is made to whoever owns the bond.
Are Bearer Bonds still issued?
No, Bearer Bonds are no longer issued in the U.S. or many other developed countries due to concerns about tax evasion and money laundering. The last ones were issued in 1982. However, they still earn interest until maturity.
What is the difference between Bearer Bonds and registered bonds?
The key difference between Bearer Bonds and registered bonds is about ownership. A Bearer Bond does not have an owner’s name on it and pays the owner whoever possesses the bond physically. In contrast, a registered bond is recorded in the name of the owner and only the named owner receives interest and principal repayments.
Is it safe to own a Bearer Bond?
Bearer Bonds carry higher risk because they can be lost or stolen since bearer bonds are owned by whoever has physical possession of them. Therefore, it is crucial to store them safely.
How does interest work on Bearer Bonds?
Interest on Bearer Bonds is often paid annually and handed to the person presenting the bond’s attached coupons. The coupons are physical pieces of paper attached to the bond, each one representing an annual interest payment.
Related Entrepreneurship Terms
- Coupon Bond
- Zero-coupon Bond
- Fixed Income Security
- NNosessory Instrument
- Fungible Instrument
Sources for More Information
- Investopedia – A comprehensive resource for finance and investment definitions, articles, and tutorials.
- Bloomberg – A global finance news platform with information and analysis on investments, businesses, technologies, and finance terms.
- Reuters – A reliable source for the latest news in business, finance, politics, and more. It also offers sector and market analyses.
- The Balance – A source for personal finance advice, tools, and articles. The website covers a wide range of topics including credit cards, insurance, retirement, investing, and more.
