Complete Guide to Bearer Bonds
Posted by Frank Gogol in Investing | Updated on May 27, 2023
Most people who are interested in investing know the way a registered bond works. However, the question on their minds is “What is a bearer bond and how is it different from a registered bond?”
Even though bearer bonds have gone out of use in the past few years, you might still wish to understand more about it. Here, we shall go over everything you need to know about a bearer bond, including some security issues related to it, as well as the US Regulation limits on bearer bonds.
Table of Contents
What is a Bearer Bond?
A bearer bond is a type of bond (i.e., a kind of fixed income security) that does not require any form of registration. Bearer bonds are similar to a traditional bond in the sense that they have a coupon interest rate as well as a maturity date.
Understanding the Bearer Bond
Even though bearer bonds can be traced back several centuries, these bonds became extremely popular during the US Civil War. Now, however, bearer bonds are almost non-existent. However, bearer bonds have continued to hold significance not only in global finance, but popular culture as well.
Bearer bonds do not have any registered owners, which means that the holder of a bearer bond is the owner of the bond. No personal information is stored in order to procure the bond, and therefore, people can obtain bearer bonds in relatively few transactions. This greatly increases the anonymity of a bearer bond.
Examples of Bearer Bond Security Issues
Since bearer bonds are highly anonymous, there are absolutely zero records as to who has sold the bond, who has purchased it and who is collecting interest on it. This means that bearer bonds are prone to several kinds of security issues. Let’s take a look at some examples.
Tax Evasion
Bearer bonds are different from a registered bond in the sense that the IRS is not notified about profits that are received from bearer bonds. It is, therefore, extremely easy for individuals to hide their assets as well their income and thus avoid paying taxes to the government.
Since it is easier for holders of the bonds to simply not declare their profits on bearer bonds, these bonds have been used illicitly by dishonest individuals to evade taxes over the years.
Moving Hidden Assets
With the kind of anonymity that a bearer bond affords, it is extremely easy for owners to not only hoard large amounts of wealth, but also to move substantial amounts from one place to another.
Loss Or Theft
The anonymity of a bearer bond makes it almost similar to cash in one sense. For instance, since there are no records attached to bearer bonds, there is no way in which you can recover it if you lose it. Disasters such as fires or floods can therefore prove to be devastating in terms of loss. The same holds for instances of theft. It is impossible to trace a bearer bond, which means that you might not get it back once it has been stolen. Coupons that have been lost in the mail also pose a problem for interest payments. The lack of documentation makes it difficult for the heirs of the owners of bearer bonds as well.
Forgery
It is extremely easy for fraudsters to just print a bunch of fake bearer bonds and use them as real money.
Money Laundering
Since it is easy for owners of bearer bonds to conceal where they originally got their bearer bonds from, it is extremely easy for them to carry out money laundering practices. All they have to do is enter the amount they have received through bearer bonds from a source that looks legitimate.
This is the reason bearer bonds do not really hold too many advantages for those individuals who are honest about their income and assets. These security issues are the reason why there have been numerous crackdowns by the government over the years, which have made bearer bonds obscure and a thing of the past.
US Regulation Limit Bearer Bonds
Bearer bonds have formed a huge part of popular culture over the years. Who can forget the scene in Die Hard (1988) when burglars stole money to the tune of $640 million in the form of bearer bonds? This is why the question that occurs to most people regarding bearer bonds is whether they can still be bought right now or not.
However, bearer bonds can no longer be bought in the United States. In fact, it was in 1982 that bearer bonds were almost entirely eliminated in the country. This occurred with the introduction of the TEFRA Act of 1982, i.e., the Tax Evasion and Fiscal Responsibility Act, which got rid of several tax benefits and placed penalties upon those who used bearer bonds.
For a while after this, it was still possible for US issuers to provide foreign investors with bearer bonds. However, at this point in time, even that has been almost eliminated. In 2010, another law was passed in the United States which removed the responsibility that had earlier been placed on brokerages and banks to redeem old bearer bonds.
As such, it no longer makes sense for US citizens to buy bearer bonds at this point of time. Not only is it impractical, but you might be left with several issues (including not getting your interest and problems with the IRS). What’s more, as of today, registered bonds provide more favourable terms to owners than bearer bonds do.
Mechanics of Bearer Bonds
Bearer bonds are much like any other debt instrument out there. They are issued by businesses and organizations, and various governments to raise funds necessary for growth and operations. Bearer bonds are quite similar to traditional bonds in terms of their mechanics. They have
A Maturity Date
With bearer bonds, there is a maturity date on which the bond owner gets back the principle he/she has invested. To receive this, the bondholder has to present the physical certificate to the bank. Sometimes, these bonds can be redeemed before the maturity date if they are ever “called” before completing the maturity date.
Interest
Bearer bonds come with coupons for every interest payment. Interest payments on bearer bonds are made at regular intervals by issuers. To claim interest, bondholders must submit a coupon to the issuer.
Bearer bonds, therefore, are essentially used to lend and borrow money, much like a mortgage or a bank does. This means that the lender can lend money in the form of bonds, and he/she will get repaid on the maturity date as well as the interest payments.
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Conclusion
Bearer bonds were extremely popular at one point in time in the United States. However, because of the anonymity and various security threats that they pose, the US government has cracked down on bearer bonds and made them virtually obscure today. As such, the future remains uncertain for these bonds, and the current trajectory even points towards complete extinction.
