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 him or her 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 instrument 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 stolen,
- Bearer bonds are frequently used by dishonest individuals, who choose not to declare their gains on these investments, in an effort to evade taxes.
- Criminal activity involving bearer bonds has been a frequent plot point in books and movies.
A Short History of Bearer Bonds
In the United States, bearer bonds were first introduced in the late 1800s, to fund Reconstruction during the post-Civil War era. These investments proved instantly popular, because they could be easily transferred and because millions of dollars could be issued using relatively few certificates, simplifying transactions. Europe and South America soon followed suit, issuing similar bonds for use in their own financial markets.
Bearer bonds are also called coupon bonds because the physical bond certificates contain attached coupons that are redeemable at an authorized agent, for biannual interest payments. This activity is commonly referred to as "clipping coupons".
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 tendering a bond certificate. Prior to restrictions imposed in 2010, a bearer bond holder need only 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, because of 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 to 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 1925 classic novel The Great Gatsby, the mysterious titular 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 taxation became more popular after World War I. Their illegal use persisted until the Tax Equity and Fiscal Responsibility Act of 1982, which outlawed new issuance of bearer bonds in the United States. Interestingly, eurobonds are still issued as electronic bearer bonds, and 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. Then, two years later in 2012, many paper certificates still in circulation, housed at the Depository Trust Company (DTC), were destroyed during Superstorm Sandy.
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.
[Important: All bearer bonds issued by the US Treasury have matured.]