DEFINITION of 'Bearer Instrument'

A bearer instrument, or bearer bond, is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. The holder is presumed to be the owner, and whoever is in possession of the physical bond is entitled to the coupon payments.

BREAKING DOWN 'Bearer Instrument'

Securities can be issued in two forms: registered or bearer. Most securities issued today are registered instruments. A registered instrument is one in which the issuing firm keeps records of a security's owner and mails out payments to him or her. The name and address of an owner of a registered security is engraved on a certificate, and dividend or interest payments can only be made out to the named security owner. To transfer ownership, the current owner must endorse the certificate which is presented to the issuer’s transfer agent. The transfer agent verifies the endorsement, cancels the certificate, and issues a new one to the new owner. The issuer, then, has a record of who owns the security and is able to make interest and dividend payments to the appropriate owner. However, it takes a while for a new security to be issued in another’s name.

An issuer of a bearer form security keeps no record of who owns the security at any given point in time. This means that the security is traded without any record of ownership, so physical possession of the security is the sole evidence of ownership. Thus, whoever produces the bearer certificate is assumed to be the owner of the security and can collect dividend and interest payments tied to the security. Ownership is transferred by simply transferring the certificate, and there is no requirement for reporting the transfer of bearer securities. Securities in bearer form can be used in certain jurisdictions to avoid transfer taxes, although taxes may be charged when bearer instruments are issued.

A bearer bond, also known as a coupon bond, is a negotiable instrument that has part of its certificate as a series of coupons, each corresponding to a scheduled interest payment on the bond. When an interest payment is due, the bondholder must clip off the coupons attached to the bond and present them for payment. For this reason, interest payments on bonds are referred to as coupons. The bearer of the bond certificate is presumed to be the owner who collects interest by clipping and depositing coupons semi-annually. The issuer will not remind the bearer of coupon payments.

Bearer instruments are used especially by investors and corporate officers who wish to retain anonymity, however, they are banned in some countries due to their potential use for abuse, such as tax evasion, illegal movement of funds, and money laundering. It has not been legal to issue bearer instruments in the U.S. municipal or corporate markets since 1982. Most jurisdictions now require corporations to maintain records of ownership or transfers of bond holdings, and do not permit bond certificates to be issued to the bearer. The only bearer instruments available in the secondary market are long-dated maturities issued before 1982, which are becoming increasingly scarce.

RELATED TERMS
  1. Bearer Bond

    A bearer bond is a fixed-income instrument that is owned by whoever ...
  2. Registered Bond

    A registered bond is a bond which has its owner registered with ...
  3. Coupon

    A coupon is the annual interest rate paid on a bond, expressed ...
  4. Coupon Bond

    A coupon bond is a debt obligation with coupons attached that ...
  5. Indexed Certificate Of Deposit ...

    A savings certificate entitling the bearer to receive an interest ...
  6. Stock Power

    A stock power is a legal power of attorney form that transfers ...
Related Articles
  1. Investing

    Old Stock Certificates: Lost Treasure or Wallpaper?

    What if you've discovered some old shares in bearer form? Follow our tips to find out what they're worth.
  2. Investing

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  3. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  4. Investing

    What are Fixed-Income Securities?

    For a fixed-income security, the periodic return on the investment is the same throughout the life of the security. Principal is returned at the time of maturity. The payment can be in the form ...
  5. Investing

    The Benefits of a Bond Portfolio

    Bonds are often viewed as stocks' less-glamorous sidekick, but they deserve more respect from investors. Learn how a fixed-income portfolio works.
  6. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  7. Investing

    Beginner's Guide To Trading Fixed Income

    Beginner's Guide To Trading Fixed Income
RELATED FAQS
  1. How does the money from the interest on my bond get to me?

    When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ... Read Answer >>
  2. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    See how fixed-income security investors can expect to use coupon rates on semi-annual payments if the bond or debt instrument ... Read Answer >>
  3. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center