What Are Bearer Bonds?
Bearer bonds are government- or corporate-issued debt instruments that differ from traditional bonds in that they're unregistered as investment securities. Consequently, no records exist that list the owners' names. As a result, whoever physically holds the paper on which the bond is issued is the presumed owner, giving them a greater measure of anonymity than more common bond offerings present. But since no investor names physically appear on bearer bond papers, it's nearly impossible to recover such bonds if they're lost or destroyed.
Bearer bonds differ from traditional bonds in other ways as well. While both bond types state maturity dates and interest rates, bearer bond coupons for interest payments are physically attached to the security and must be submitted to an authorized agent in order to receive payment.
- Bearer bonds are fixed income instruments whose certificates do not contain the holder's personal information.
- Due to the anonymity of bearer bonds, it is impossible to determine their rightful owner if they're lost or stolen.
- Bearer bonds are sometimes used by individuals who choose not to declare their gains on these investments, in an effort to evade taxes.
- Bearer bonds were issued in the United States in the late 1800s to fund Reconstruction during the post-Civil War era.
- All bearer bonds issued by the U.S. Treasury have matured.
Understanding Bearer Bonds
Bearer bonds were first introduced in the United States in the late 1800s to fund Reconstruction during the post-Civil War era. These investments proved instantly popular because of their ability to be easily transferred. Bearer bonds simplified transactions because millions of dollars could be issued using relatively few certificates. Europe and South America soon followed suit, issuing similar bonds for use in their own financial markets.
All bearer bonds issued by the U.S. Treasury have matured.
The Risks of Bearer Bonds
There is no registered owner's name printed on the face of a bearer bond, historically allowing interest and principal to be paid without question to anyone who supplied a bond certificate. Prior to restrictions imposed in 2010, a bearer bond holder was only required to submit certificates to the issuer's agent at the maturity date to anonymously cash them for face value. While expeditious, this practice held intrinsic risk. If the bond was stolen, there was no way of tracing the bond back to its rightful beneficiary.
These instruments were also problematic if bond issuers failed to honor their obligations to pay the interest and principal payments. In such circumstances, if investors elected to pursue legal action in court, they were required to surrender their ownership anonymity, thus defeating the purpose of buying such bonds in the first place.
In one famous case in the late 1920s, German banks issued many millions of dollars in bearer bonds, as part of Germany's agricultural improvement efforts. Although the bonds were due to mature in 1958 and were supposed to be payable in New York, neither interest nor principal has been paid to this day.
Criminal Uses of Bearer Bonds
Bearer bonds have historically been the favored financial instrument for money launderers, tax evaders, and others looking to conceal business transactions. In fact, bearer bond fraud has been a frequent subject in literature and Hollywood films. In the classic 1925 novel, The Great Gatsby, the mysterious main character schemed to sell bearer bonds of questionable origin. And in late 20th century movies Beverly Hills Cop, Die Hard, Heat, and Panic Room, villains steal millions of dollars in bearer bonds.
The use of bearer bonds to dodge taxes became more popular after World War I. Their illegal use persisted until the Tax Equity and Fiscal Responsibility Act of 1982, which outlawed the new issuance of bearer bonds in the United States. Interestingly, Eurobonds are still issued as electronic bearer bonds. U.S. corporations are able to issue their bonds into the European market in that form.
The Future of Bearer Bonds
Most bearer bonds currently in circulation were issued when interest rates were relatively high. Consequently, many were called before their maturity dates, in order to reduce carrying costs to issuers. Current redemptions have become nearly non-existent due to a 2010 law that relieved banks and brokerages of their redemption responsibility.
Bearer Bonds FAQs
Are bearer bonds legal anywhere?
Bearer bonds are virtually extinct in the U.S. and most other countries as the lack of registration made them ideal for use in money laundering, tax evasion, and any number of other under-handed transactions.
Are bearer bonds still worth anything?
If you still own a bearer bond, you won't be able to cash the bond in for its interest value, however, the paper certificate may contain some value as a collector's item.
What is the purpose of bearer bonds?
Bearer bonds were issued in the U.S., for example, during the Reconstruction Era as a way for the government to raise money for various projects.
Do bearer bonds expire?
While bearer bonds do not technically have an expiration date beyond their date of maturity, today's bearer bondholders will have trouble cashing in their bonds as banks are no longer required to fulfill the bearer bond's value and the U.S. Treasury has stopped issuing them.
What is the difference between bearer bonds and registered bonds?
While registered bonds have a written and electronic record of the bond's owner and maturity date, bearer bonds are unregistered as investment securities and have no record of the certificate's owner.
The Bottom Line
Bearer bonds are easily transferable anonymous debt instruments that hold certain advantages over other forms of currency. But these very attributes have made bearer bonds a popular vehicle that criminals exploit, to circumvent the law. As a result, the future of bearer bonds remains uncertain, and U.S.-issued bonds are marching towards extinction.