What is a 'Bearer Bond'

A bearer bond is a fixed-income security that is owned by the holder (bearer), rather than a registered owner. Coupons for interest payments are physically attached to the security, and it is the bondholder's responsibility to submit the coupons to a bank for payment and redeem the physical certificate when the bond reaches the maturity date. As with registered bonds, bearer bonds are negotiable instruments with a stated maturity date and coupon interest rate.

BREAKING DOWN 'Bearer Bond'

The Tax Equity and Fiscal Responsibility Act of 1982 ended the practice of issuing bearer bonds in the United States. Many other developed economies have also stopped issuing these bonds, because bearer bonds can be used for money laundering or tax evasion.

Factoring in Legal Issues

An individual can buy a large dollar amount of bearer bonds and submit the coupons for payment and remain anonymous, since the bonds are not registered in the owner's name. In 2009, UBS, a multinational financial services company, paid $780 million and agreed to a deferred prosecution agreement with the Justice Department, because the firm was accused of helping American citizens evade taxes using bearer bonds. In addition, the lack of bond registration offers little protection or recourse if the physical certificate is stolen from an investor, because the custodians do not have the name of the owner on file.

Examples of Bearer Bond Security Issues

Most owners of bearer bonds find the need to file the physical certificate in a safe deposit box at a bank or in a safe at home. Clipping coupons to receive interest can cause problems, if the coupons are sent by mail and get lost. To redeem the bond at maturity, the bond needs to be delivered to a bank in person or by courier. Bearer bonds also make it difficult for heirs to deal with the investment portfolio of someone who has died. In many cases, elderly people lose track of where bearer bonds are located or do not provide instructions for their financial advisors or heirs to find the physical certificates.

How Book-Entry Securities Work

Nearly all securities are now issued in book-entry form, which means that the security is registered in the investor’s name electronically; no physical certificate is issued. A registrar or transfer agent is responsible for tracking the name of each registered owner, and ensuring the bond owners receive all interest payments and that stockholders receive both cash and stock dividends. When a book-entry security is sold, a transfer agent or registrar changes the name of the registered owner.

RELATED TERMS
  1. Bearer Form

    A bearer form is a security not registered in the issuing corporation's ...
  2. Registered Bond

    A bond whose owner is registered with the bond's issuer. The ...
  3. Coupon

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

    A debt obligation with coupons attached that represent semiannual ...
  5. Definitive Securities

    Securities that are issued in the form of a paper certificate ...
  6. Bond Valuation

    Bond valuation is a technique for determining the theoretical ...
Related Articles
  1. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  2. Investing

    Corporate Bonds: Advantages and Disadvantages

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

    Present Value Of Different Bond Types Using Excel

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future - we can use an Excel spreadsheet.
  4. Investing

    Understanding Bond Prices and Yields

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

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  6. Investing

    The 4 Biggest Bond Myths

    Bonds can be a great addition to a portfolio but be aware of these four myths.
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. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  3. What is accrued interest, and why do I have to pay it when I buy a bond?

    An investor who sells a bond must be compensated in coupon payments for the period they owned the bond, defined as the interest ... Read Answer >>
  4. What is the difference between yield to maturity and the coupon rate?

    A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value. Read Answer >>
Hot Definitions
  1. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  2. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  3. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  4. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  5. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center