Updated July 17, 2023
Definition of Bearer Bonds
Bearer bond is a bond, debt security, or in other words fixed-income security issued by the company, business unit, and other issuers. The bearer bonds is owned by the holder or bearer.
They are unregistered and hence no record is kept of the original owner on the bond papers. In case of theft, loss, or destruction it is generally impossible to recover the value of the bearer bond except for in few cases.
The fixed interest payment is paid to the bondholders in the case of bearer bonds. The coupon for interest payment is physically attached to the bond papers, which the bearer will have to present to the bank for payment purposes. Also, the bearer will have to present the physical certificate as well to the bank to recover the maturity value at the time of maturity date.
Bearer bonds are negotiable instruments with a fixed maturity date and coupon payments. Nowadays, bearer bonds have become extinct in countries like the U.S. because of the fact that they are not registered and can be used for money laundering and tax evasion purposes. They are also used to carry out a concealed business transaction. All of these things are possible because the bearer bonds are not registered and the investor remains anonymous.
Purpose of Bearer Bonds
A bearer bond is not a registered instrument and therefore, owners can keep themselves anonymous. Anyone bearing the bond papers can collect the coupon payment and redemption value at the maturity date. These bonds were originally issued for raising finance and providing fixed income in return to the investors by the companies. But the feature of anonymity made this investment option quite popular and investors now use these bonds for altogether different purposes.
Investors use this bond for hiding their income and asset by investing in high denomination bearer bonds. It also makes taking a large sum of money overseas easier; tax evasion is also easy as an investor can transfer the money in these bonds and earn interest over them and remove them completely from financial accounts. The investor can easily use bearer bonds for money laundering purposes by investing a large sum of money in these bonds and induce them in the system through a legitimate source which is a threat to any economy.
How Does a Bearer Bond Work?
- In bearer bond, no record is kept of the owner. These are unregistered financial instruments issued by corporates and companies.
- Interest payment can be collected by anyone holding the bearer bond by presenting the coupon for interest payments to the bank, coupons for interest payments are physically attached to the bond papers.
- No payment record is kept by the bank for bearer bonds.
- Owners of the bearer bond can keep themselves anonymous.
- They can be transferred to anyone without much hassle as there is already no name on the bond papers.
Example of Bearer Bonds
Let us take an example where an investor purchases bearer bonds for $500 value from an XYZ company at the coupon rate of 9%. The XYZ company will pay a fixed interest of $45 ($500* 9%) to investors. For collecting interest, an investor will have to tear the coupon leaf from the bond papers and present it to the agent of the company or bank. And anyone else on behalf of the investor can also collect the coupon payment. In case of theft also, the company would not ask any questions and will pay the bearer any interest or redemption amount.
Uses of Bearer Bonds
The intended use of bearer bonds was to raise finance by the companies and source of fixed income for investors. But due to the anonymity feature and unregistered nature, it is used for the following as well:
- Investors use it for concealing their assets and income.
- Bearer bonds are used for tax evasion and money laundering purposes.
- They can also be used for moving a hefty sum of money with ease.
- In case of theft or loss, it is practically impossible to know the owner, thus a dishonest individual can use it for their benefits.
Advantages of Bearer Bonds
The advantages of bearer bonds are as follows:
- It is a source of raising finance by the companies and government; the raised money is then used to finance the growth and development of the economy.
- The annual or periodical interest payment is acknowledged and paid immediately once the coupon for interest payment is presented.
- They are easily transferable from one individual to others without much hassle.
- They are easily redeemable at the time of redemption.
- The anonymity of the owner can be kept and maintained in case of bearer bond investments.
Risks of Bearer Bonds
Multiple risks are attached with the bearer bonds, which are mentioned as below:
- The risk of money laundering is high as investors might use this for the purpose of transferring their black money and reinsert in the economy through a legitimate source.
- The risk of tax evasion also exists as the investor can completely take out this money from their financial accounts and invest in bearer bonds and earn interest over them.
- These bearer bonds are taken as a chance and thus exploited by the criminals.
- They lead to the circumvention of law and concealment of business transactions.
- Tracing or determination of the rightful owner is not possible in case of theft.
- The risk of loss of money arises in case the bond papers are destroyed or lost.
Bearer bond are a risky investment not in the terms of return but due to its various bold features which expose the bearer, the company issuing such bonds, and the economy to different risks. If it goes in the hand of dishonest individuals, they can use it for their benefit. This is the reason it is now prohibited or extinct in many countries like the U.S. But needless to say, that it still plays a big role in global finance and culture. The better version of these bonds is a registered one where ownership can be identified and tracked.
This is a guide to Bearer Bonds. Here we also discuss the definition and how does a bearer bond work? along with advantages and uses. You may also have a look at the following articles to learn more –