Bearer Bonds: The Basics
08:54, 9 May 2017
What is a bearer bond?
A bearer bond, often referred to as a coupon bond, is an unregistered bond. In comparison to an ‘ordinary’ bond, it fully belongs to a person who holds it. Not a single ownership record exists. Whoever keeps it is considered an owner.
Bearer bonds are issued physically, e.g. on paper. To receive interest payments, an owner needs to pin coupons to a bearer bond and submit them to a bank or company to redeem the money.
What are their key differences from registered bonds?
Unlike their registered counterparts, bearer bonds are not subjects to taxes. As there is no record of the ownership details, it’s absolutely impossible to track taxable income.
Holders of bearer bonds take full responsibility in all matters including security, interest payments, principal payment etc. They do all the paper work on their own. On the other hand, if you own a bearer bond, you can sell it without a third party. No intermediary is needed since the procedure is completely and utterly simple. You hand over the certificate to another person. That’s it.
When did they appear?
The first bearer bonds appeared right after the Civil War in the USA. Back then every single penny counted. People were constantly inventing new ways to raise extra funds for reconstruction.
Why do people choose bearer bonds?
Firstly, to remain anonymous. Secondly, owners of bearer bonds are able not to report any profits that comes from holding this type of bond.
Are there any risks?
Yes, there are. As there is no name or any other data printed on a bond, interest payments and final payment can be requested by anybody. In other words, if a person steals a bearer bond from you, you can say goodbye to it.
Also, an issuer can call back a bearer bond. For example, when interest rates suddenly rise. Nevertheless, there is a certain agreement between an issuer and an owner. If the agreement specifies how often interest payments should be paid out, the issuer must stick to the rules.
How do I cash in bearer bonds?
To cash them, bearer bonds holders usually contact a bond agent and send him the bonds with coupons attached.
What It’s All About?
Yes, the impossibility of tracing income remains high on the list of the biggest pluses of bearer bonds. But you should approach such kind of investment wisely as unregistered debt securities carry more risks in comparison to their registered counterparts.