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.
Understanding 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.