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What Are Bearer Bonds (and How Do They Work)?

5 minute read

Devon Taylor

By Devon Taylor

A bearer bond is a fixed-income security, very similar to a regular bond. However, a bearer bond is owned by the holder (or bearer) rather than by a registered owner. The coupons for interest payments are physically attached to the bearer bond. The bondholder is required to submit the coupons to a bank for payment and then redeem the physical certificate when the bond reaches its maturity date.

As with registered bonds, bearer bonds are negotiable instruments. They have a stated maturity date and a coupon interest rate. Today, bearer bonds are virtually extinct in the United States and most other countries. Their lack of registration made them ideal for use in money laundering, tax evasion, and any number of other illicit transactions. Bearer bonds also proved vulnerable to theft. As such, U.S. regulators took steps throughout the 1990s to discontinue bearer bonds. These days, they are basically relics of the past.

The History Of Bearer Bond

In the U.S., bearer bonds were issued by the federal government or corporations from the late 19th century until the end of the 20th century. The bonds gradually lost their popularity and were replaced by newer investment vehicles and modern technology. Eventually, bearer bonds were outlawed by various governments in an effort to halt money laundering.

The few bearer bonds that remain today are typically issued in book-entry form. That means they are registered in the investor’s name electronically. Physical certificates are no longer issues, which prevents them from being stolen.

A registrar or transfer agent is responsible for tracking the name of each registered owner of a stock or a bond. This ensures that bond owners receive all interest payments due or that stockholders receive their cash and stock dividends. Each time a book-entry security is sold, a transfer agent or registrar changes the name of the registered owner.

Advantages Of Bearer Bond

As with other fixed-income instruments, money raised by the issue of bearer bonds is used to fund the growth and operations of the enterprises or government. The interest payments are paid on a periodic basis. The coupons submitted to an agent or banker are acknowledged immediately, and payment is made.

The principal amount of the bond is received promptly as of the date of maturity. Bearer bonds are also easily transferable. As such, anonymity can be maintained with bearer bonds. For this reason, bearer bonds proved popular with wealthy investors who valued privacy. Of course, they also attracted criminal organizations who found that anonymity made it easier to launder the profits of their criminal activity.

Disadvantages Of Bearer Bond

One major disadvantage was that bearer bonds were originally physical certificates. This made them easy to lose or be subject to theft or accidental destruction. If your bearer bond ceased to exist for any reason, it was impossible to recover. The rightful owners never had their names registered on it. That meant there was no recourse available to owners who lost their certificates somehow.

If the owner of a bearer bond passed away, the bonds would sometimes become useless. Unless the deceased informs their heirs exactly where the bonds were kept, they were sometimes lost forever in safes, lawyer’s filing cabinets, or security deposit boxes at banks. Without the physical copy of the bond, the value was lost completely.

Bearer bonds were often used for tax evasion purposes, drawing the ire of governments around the world. By the early 1980s, many governments were taking steps to end the use of this investment type. These days, regulators want major investment sums registered and tracked. This helps cut down on money laundering or tax evasion. As the word went digital, bearer bonds quickly faded from relevance. 

Taxes and Bearer Bonds

The Tax Equity and Fiscal Responsibility Act of 1982 effectively ended the practice of issuing bearer bonds in the United States. However, it took until nearly 2000 for the bonds to largely be removed from the U.S. financial system. Today, bearer bonds are no longer issued by the U.S. Treasury. Any bonds issued in the past have long since passed their maturity dates.

An individual investor could previously buy any amount of bearer bonds they wanted, submit the coupons for payment, and remain completely anonymous. After all, the bonds were not registered in the owner’s name. In 2009, the multinational financial services company UBS faced serious legal consequences. They paid $780 million in fines and agreed to a deferred prosecution agreement with the U.S. Justice Department, after they were accused of helping American citizens evade taxes using bearer bonds.

Bearer Bonds Are Basically Obsolete

As we said, bearer bonds had no registration system. The lack of registration meant there was little protection or recourse to investors who had their certificates lost, stolen, or destroyed. The “real owner” was never on file anywhere, so any person could present the bond and receive the appropriate payments for them. As such, bearer bonds were heavily used in various manipulation schemes and criminal activities.

Old bearer bonds issued by corporations may or may not have retained their face value — even if the maturity dates have long since passed. While old bearer bonds continue to surface, it’s not clear how much value (if any) they have today. You may not even be able to redeem them at banks or other financial institutions anymore. A new 2010 U.S. law was passed to relieve banks and brokerages from responsibility for redeeming old bearer bonds.

If you have old bearer bonds lying around, you’re only hope might be to contact the company that issued them (if it still exists). You can also try to company that may have bought it or merged with it. If you’re lucky, they will honor the old bearer bonds. However, there’s no guarantee.

Security Issues

Most owners of bearer bonds keep the physical certificates in a safe deposit box at a bank or in a safe at home. To try and redeem the bond at maturity, the bond needs to be delivered to a bank in person or by courier. Getting the interest payments is also problematic since the coupons can get lost in the mail.

These realities often create problems for those who are left bearer bonds in the will of a deceased relative. First they have to track down the physical certificates. Then they have to try and figure out a way to exchange the bonds for their cash values. If there is any cash value at all, that is. Those who practice organized estate planning might have attached all the proper bond documentation to their will, making it easier for their heirs to sort everything out.

The Bottom Line

Bearer bonds are largely a product of a bygone era. The investment vehicle was popular in the 20th century, but was brought to an end by regulatory action taken in the 1980s. The anonymous nature of bearer bonds made them too attractive to criminals and tax evaders. If you find yourself in possession of bear bonds today, you’ll have to check with the bond’s issuer. Most banks no longer bother with bearer bonds, since they aren’t legally obligated to redeem them for cash any more. Unfortunately, your bonds could end up being defunct and worthless at this point. Still, it doesn’t hurt to make the effort to find out. It could be a nice unexpected boost to your budget!

Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, camping with his family, and playing video games.


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