What are bearer bonds?
Bearer bonds are government-issued or corporate-issued debt certificates that differ from traditional bonds in that they are unregistered as investment securities. Therefore, there is no record listing the owner’s name. As a result, anyone who physically holds the paper on which the bond was issued is presumed to be the owner, and has a greater measure of anonymity than today’s more common bond offerings. However, bearer bonds do not physically bear the investor’s name, making it nearly impossible to recover such bonds if they are lost or destroyed.
Bearer bonds also differ from traditional bonds in other ways. Both bond types have a maturity date and interest rate, but bearer bond coupons for interest payments are physically attached to the security and must be submitted to an authorized agent to receive payment.
- An bearer bond is a bond whose certificate does not contain the holder’s personal information.
- Bearer bonds are anonymous, so if they are lost or stolen, no legitimate owner can be identified.
- Bearer bonds may be used by individuals who choose not to declare a return on these investments for tax evasion purposes.
- Bearer bonds were first introduced in the United States in the late 1800s to fund post-Civil War reconstruction.
- All bearer bonds issued by the US Treasury have reached maturity.
Understand bearer bonds
Bearer bonds were first introduced in the United States in the late 1800s to fund post-Civil War reconstruction. These investments were quickly popular because they were easy to transfer. Bearer bonds have simplified trading because they can issue millions of dollars with relatively few certificates. Europe and South America soon followed, issuing similar bonds for use in their own financial markets.
Bearer bonds are also called coupon bonds. This is because the physical bond certificate comes with a coupon that can be used by authorized agents to pay interest twice a year.
All bearer bonds issued by the US Treasury have reached maturity.
Bearer bond risk
The name of the owner registered on the surface of the bearer bond is not printed and historically you can undoubtedly pay interest and principal to the person who provided the bond certificate. Prior to the 2010 restrictions, bearer bondholders had to submit a certificate to the issuer’s agent on the maturity date to anonymously monetize at par. Although quick, there were inherent risks to this practice. If a bond was stolen, there was no way to trace it back to its legitimate beneficiaries.
These products were also problematic if the bond issuer failed to meet its interest and principal payment obligations. Under these circumstances, if investors chose to file a proceeding in court, they would have to waive their ownership anonymity, invalidating the purpose of purchasing such bonds in the first place.
In one of the notable cases of the late 1920s, German banks issued millions of dollars of bearer bonds as part of Germany’s agricultural improvement efforts. The bond matured in 1958 and was to be paid in New York, but to date no interest or principal has been paid.
Criminal use of bearer bonds
Bearer bonds have historically been the preferred financial instrument for money launderers, tax evaders, and others trying to hide their commerce. In fact, bearer bond fraud has been frequently featured in literature and Hollywood movies. In the classic 1925 novel, Great Gatsby, A mysterious hero planned to sell bearer bonds of suspicious origin.And in movies of the second half of the 20th century Beverly Hills Cop, Die Hard, heat, When Panic room, The villain steals millions of dollars in bearer bonds.
After World War I, the use of bearer bonds to fend off taxes became more common. Their illegal use continued until the 1982 Tax Fairness and Fiscal Liability Act outlawed the issuance of new bearer bonds in the United States. Interestingly, Eurobonds are still issued as electronic bearer bonds. US companies can issue bonds to the European market in that form.
The future of bearer bonds
Most bearer bonds in circulation today were issued when interest rates were relatively high. As a result, many were called before the maturity date to reduce shipping costs to the issuer. With the 2010 law exempting banks and securities firms from liability for redemption, current redemptions are almost non-existent.
FAQ about bearer bonds
Are bearer bonds legal everywhere?
Bearer bonds are virtually extinguished in the United States and most other countries because they are ideal for use in money laundering, tax evasion, and other unmanageable transactions due to their lack of registration.
Are bearer bonds still worth anything?
If you still own a bearer bond, you cannot monetize the bond because of its interest value, but the paper certificate may contain some value as a collector’s item.
What is the purpose of bearer bonds?
Bearer bonds were first issued in the United States during the reconstruction period as a way for the government to raise funds for various projects.
Will bearer bonds expire?
Although there is technically no expiration date beyond the maturity date of bearer bonds, today’s bearer bondholders will no longer have to fulfill the value of bearer bonds and the U.S. Treasury has suspended the issuance of the bonds, resulting in cash on the bonds. There is a problem with monetization.
What is the difference between bearer bonds and registered bonds?
Registered bonds have a written and electronic record of the bond owner and maturity date, but bearer bonds are not registered as investment securities and there is no record of the certificate owner.
Anonymous bonds are easily transferable anonymous debt certificates with certain advantages over other forms of currency. However, these qualities make bearer bonds a popular means of abuse by criminals to circumvent the law. As a result, the future of bearer bonds remains uncertain, and US-issued bonds are heading toward extinction.