What is a Bearer Bond?
A bearer bond is a fixed-income security owned by the holder or bearer rather than by a registered owner. Interest payments are made via physically attached coupons. To retrieve the interest payments, bondholders must present these coupons to a bank, and to receive the maturity value, they must redeem the physical certificate at the maturity date.
Bearer bonds function similarly to registered bonds as negotiable instruments with a specified maturity date and a coupon interest rate. However, the absence of ownership registration made them attractive for illicit activities, including money laundering and tax evasion, leading to their decline in use in countries like the U.S. Nonetheless, bearer bonds still exist in some countries today.
Key Takeaways
- A bearer bond is a physical certificate with attached coupons for interest redemption.
- Without registration, the bond’s owner is the individual possessing it.
- Bearer bonds are as susceptible to theft or loss as cash.
- The U.S. ceased issuing bearer bonds after 1982.
- Existing government bearer bonds can be claimed through TreasuryDirect; claims on corporate bonds may not be successful.
Understanding Bearer Bonds
Bearer bonds are unregistered bonds issued by governments or corporations and sold to investors to raise capital. The bondholder’s possession of the physical certificate entitles them to the payments and principal value upon maturity.
U.S. bearer bonds emerged post-Civil War up until the mid-20th century. Due to vulnerabilities and technological advancements, their issuance was halted by the U.S. government in 1982 under the Tax Equity and Fiscal Responsibility Act. Investors began to prefer more secure and registered forms of securities.
Redeeming Old Bearer Bonds
For those still holding old bearer bonds, it is possible to claim them. The proper procedure for U.S. government bonds involves sending the physical bonds and attached coupons via insured mail. Payments will be sent to the specified address once the IRS Form W-9 is submitted.
Banks and brokerages are no longer obligated to redeem old bearer bonds due to a law passed in 2010. Corporate bearer bonds’ values are subject to the issuing company’s current status. It might require contacting the involved entity or its successor company to determine bond redemption eligibility.
How Bonds Are Issued and Registered Today
Traditional bearer bonds have been replaced by modern bonds, primarily in the digital form. Securities are now predominantly book-entry, which means they are electronically registered under the owner’s name without issuing a physical certificate.
Registrars or transfer agents handle the tracking, name updates, and ensuring accurate interest payments and dividends for registered bonds’ owners. Automation facilitates this streamlined process.
Are Bearer Bonds Illegal in the U.S.?
Yes, new issue of bearer bonds has been illegal in the U.S. since 1982. Pre-existing bonds can still be redeemed, but no new bearer bonds can be issued legally.
What Is the Difference Between a Bearer Bond and a Registered Bond?
A registered bond records the purchaser’s name and identity, ensuring only the listed owner receives bond payments and principal value. In contrast, bearer bonds had no registration - whoever held the bond could claim its value. The shift to registered bonds offered more security to investors.
What Can You Do With Old Bearer Bonds?
For individuals with old bearer bonds, reaching out to the U.S. Treasury is essential for bond redemption. Send the bonds and coupons via insured mail and accompany it with IRS Form W-9 for processing. Payments will be issued to the provided address.
The Bottom Line
Over time, federal regulations have increasingly protected investors and ensured transaction transparency. The shift from bearer bonds, vulnerable to theft and misuse, to more secure, registered bonds reflects advances in financial regulation. Nowadays, bonds are registered, ensuring rightful owners receive payments securely and efficiently. The era of bearer bonds ended, paving the way for sophisticated digital securities that reliably safeguard investors’ interests.
Related Terms: registered bond, negotiable instruments, transferable securities, Tax Equity and Fiscal Responsibility Act, TreasuryDirect, IRS Form W-9
References
- U.S. Congress. “H.R.4961 Tax Equity and Fiscal Responsibility Act of 1982”.
- TreasuryDirect. “How Treasury Marketable Securities Work”.
- RecordsFinder. “What Is Bearer Bond and Why the U.S. Banned It”.
- TreasuryDirect. “Dealing With Old Paper Treasury Marketable Securities”.
- U.S. Congress. “H.R.2847 - Hiring Incentives to Restore Employment Act”.
