Bearer Bonds – What are Bearer Bonds?
Bonds are securities used by companies or governments to borrow money on financial markets. There are bonds at fixed rates and those vary from year to year. The forms are called bearer bonds which are the topic of this article. But before we see what exactly bearer bonds are, let’s see how they work.
By purchasing bonds, you receive interest in return for this loan – we call it the “coupon” – and at the stipulated term, the issuer repays you the amount borrowed. During their life, the bonds are listed on a stock exchange which allows you to resell them before their maturity or buy others during their life. There are many categories with very variable characteristics.
How much does it bring in? You receive the interest on your investment every year on the same date in the form of a coupon, regardless of the company’s results. They are subject to income tax and social security contributions.
You can resell your bonds on the stock market before the planned term. You can get from this sale:
- a capital gain if your resale price is higher than the acquisition price,
- a loss in value otherwise.
If you keep the bonds until the end, you get back the amount initially invested (coupon aside). In certain cases, you may receive a refund greater than the amount initially loaned. The difference then corresponds to the “issue premium” and/or the “reimbursement premium”.4
The different types of bonds
Depending on how the interest rate is calculated, we distinguish between bonds:
at a fixed rate: you receive a fixed coupon, generally annually, for the entire duration of the loan,
variable rate: interest is calculated on the basis of a reference rate, generally a market rate, updated each year. The coupon may therefore vary more or less from one year to the next.
indexed: the interest rate is updated each year based on an index such as the construction index, a stock market index, etc. The coupon may therefore vary, there too.
Definition of bearer bonds – bearer bonds explained
A bearer bond is a type of investment that is not owned by a registered owner, but instead by the holder, or bearer. The bond includes coupons that are physically connected to the investment and represent interest payments.
The bondholder must present these coupons to a bank in order to receive payment, and then redeem the physical certificate when the bond reaches its maturity date. Similar to registered bonds, bearer bonds are considered negotiable instruments with a set maturity date and a fixed interest rate.
Bearer bonds have almost vanished in the United States and several other nations due to their lack of registration, which made them perfect for illicit activities like money laundering, tax evasion, and various other dishonest operations. Moreover, they are susceptible to theft.
A bearer bond is a tangible document with attached coupons that serve to reimburse interest payments. Since their ownership is not recorded, the individual in possession of the bearer bond is considered its rightful owner. Like cash, bearer bonds are highly vulnerable to theft or misplacement. Nevertheless, they are still being issued in numerous countries.
Understanding the bearer bonds
During the late 1800s to the latter half of the 1900s, the United States government and corporations issued bearer bonds. However, these bonds gradually fell out of favor due to advancements in technology, investor worries about their susceptibility to loss or theft, and government regulations aimed at preventing money laundering.
Nowadays, nearly all securities are issued in book-entry format, which entails electronically registering them under the investor’s name. This means that physical certificates are no longer issued.
The duty of a registrar or transfer agent is to monitor and record the identity of every individual who owns a stock or bond. This guarantees that bondholders receive their rightful interest payments and that shareholders obtain their dividends in the form of cash or stock.
Whenever a financial security is sold, the name of the registered owner is modified by either a transfer agent or registrar. It is evident that this process heavily relies on automation; otherwise, it would fail to function efficiently.
American policy on bearer bonds
The issuance of bearer bonds in the United States was effectively terminated by the Tax Fairness and Fiscal Responsibility Act of 1982.
The U.S. Treasury no longer issues bearer bonds and those that were previously issued have already exceeded their maturity date.
An individual has the option to purchase bearer bonds in any quantity they desire, and can then redeem the attached coupons for payment. The advantage of these bonds is that the owner can remain anonymous, as they are not registered under their name.
In 2009, UBS, a multinational financial services company, made a payment of $780 million and reached a deferred prosecution agreement with the U.S. Department of Justice. This was a result of allegations that the company facilitated tax evasion for U.S. citizens through the use of bearer securities.
Bearer bonds were effectively eliminated in the United States in 1982.
Due to the absence of bond registration, investors have very limited protection or recourse if the physical certificate is stolen. This is because the custodians do not possess the name of the actual owner on record.
Bearer bonds, also known as coupon bonds, may possess a stated value. Bearer bonds issued by corporations in the past might or might not have retained their original value, even after their maturity dates have passed a long time ago.
A legislation passed in 2010 in the United States relieved banks and brokerage firms from the obligation of repurchasing old bearer bonds.
If someone discovers a corporate bearer bond, they can verify the name of the company that issued it and get in touch with either that company, if it still exists, or the company that redeemed it, if it has been bought back. In such cases, the bearer bond can be redeemed and honored.
Examples of issues of bearer securities
Many individuals who possess bearer bonds choose to store the actual paper certificates in a secure location at a bank or in a personal safe at home. In order to receive the full repayment of the bond upon its maturity, it is necessary to physically deliver the bond to a bank either in person or through a reliable courier service.
Obtaining interest payments can also present challenges as the coupons may potentially go missing during transit through the postal system.
The ownership of bearer securities can pose complications for the beneficiaries of the bondholders. However, this issue can be resolved by including the necessary documentation within the owner’s last will and testament.