WHAT IS 'Definitive Securities'

Definitive securities are securities that are issued with a paper certificate.  They stand in contrast to book-entry securities, which are only entered into a computer system. Definitive securities can be issued by governments or corporations, though they are significantly less common today than they were before widespread digitization.

Bearer bonds are a type of definitive security, in that they are issued in certificate form and are not attached to an investor’s name. Whoever presents the bond’s coupon payments and certificate receives the money owed. Registered bonds are also considered definitive securities, though they are attached to the purchaser’s name. Thus, they can only be redeemed by the person in whose name the bond is “registered”—regardless of who presents the bond certificate.

BREAKING DOWN 'Definitive Securities'

Definitive securities have fallen out of favor largely because of electronic record-keeping. Paper certificates are easily lost and prone to theft and fraud. In order to redeem coupons for bearer bonds, investors formerly had to physically cut the paper coupons and mail them to the issuer for redemption. This process today is largely seen as inefficient and too susceptible to loss. Even securities that today are issued with paper certificates are almost always also recorded electronically for the security of the investor.

Bearer bonds today

Bearer bonds were last issued in the U.S. in 1982 before the passing of the Tax Equity and Fiscal Responsibility Act. The act effectively put an end to these types of bonds. Because bearer bonds were not attached to an investor’s name, they were a way for people to invest, and therefore accumulate money anonymously. This could allow for tax fraud and evasion on the part of the investor.

However, bearer bonds can still be purchased in countries outside of the U.S. For example, Eurobonds are a popular type of bearer bond that allows foreign citizens to invest their money in a company or government of another country. Interstingly, neither the investor nor the issuer has to be in Europe or using the euro, as the name would seem to imply.

One example of a notable Eurobond was one issued by Apple in 2014, through which the company raised 2.8 billion euros. While investors could be accused of purchasing these bonds to avoid paying taxes at home, investment in bearer bonds remains legal. Furthermore, it can be a way for companies issuing them to pay lower yields than they would have to pay at home. This is possible when a company chooses to issue its bonds in a country where interest rates are currently lower than in their home country.

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