Bearer bonds: from popular to banned

What is a bearer bond?

Bearer bonds are debt instruments issued by governments or companies. The difference from traditional bonds is that they are not registered as investment securities. Therefore, there is no record listing the owner’s name. Therefore, the person who actually holds the bond issuance is the presumed owner, which gives them greater anonymity than the more common bond issuance at present. However, since the investor’s name does not actually appear on the bearer bonds, if these bonds are lost or destroyed, it is almost impossible to recover them.

Bearer bonds are also different from traditional bonds in other respects. Although both bond types specify maturity and interest rates, the bearer bond coupons used to pay interest are actually attached to the securities and must be submitted to an authorized agent to receive payment.

Key points

  • A bearer bond is a fixed-income instrument whose certificate does not contain the holder’s personal information.
  • Due to the anonymity of bearer bonds, if they are lost or stolen, the rightful owner cannot be determined.
  • Bearer bonds are sometimes used by individuals who choose not to declare these investment income to avoid taxation.
  • In the late 1800s, the United States issued bearer bonds to fund reconstruction in the post-Civil War period.
  • All bearer bonds issued by the U.S. Treasury Department have matured.

Understanding bearer bonds

Bearer bonds were first introduced in the United States in the late 1800s to fund reconstruction in the post-Civil War period. It turns out that these investments are immediately welcomed because they can be easily transferred. Bearer bonds simplify transactions because millions of dollars can be issued with relatively few certificates. Europe and South America quickly followed suit and issued similar bonds for use in their own financial markets.

Bearer bonds are also called coupon bonds, because physical bond certificates contain additional coupons that can be redeemed by authorized agents, and interest is paid every two years.

All bearer bonds issued by the U.S. Treasury Department have matured.

Risk of bearer bonds

The bearer bond does not have the name of the registered owner printed on the surface, and historically allowed the payment of interest and principal to anyone who provided the bond certificate without question. Before the restrictions were implemented in 2010, bearer bondholders only had to submit a certificate to the issuer’s agent on the maturity date to anonymously redeem their face value. Although this approach is rapid, there are inherent risks. If the bond is stolen, the bond cannot be traced back to its legal beneficiary.

If the bond issuer fails to meet the obligation to pay interest and principal, these tools will also have problems. In this case, if investors choose to take legal action in court, they will be required to give up ownership anonymity, thus losing their original intention to buy such bonds.

In a famous case in the late 1920s, a German bank issued millions of dollars of bearer bonds as part of Germany’s agricultural improvement work. Although these bonds will mature in 1958 and should be paid in New York, until today, neither interest nor principal has been paid.

Criminal use of bearer bonds

Bearer bonds have historically been a financial tool favored by money launderers, tax evaders, and others seeking to conceal commercial transactions. In fact, bearer bond fraud has always been a common topic in literature and Hollywood movies. In the classic novel of 1925, The great Gatsby, The mysterious protagonist plans to sell bearer bonds of dubious origin.In the movies of the late 20th century Beverly Hills Police Die-hard and stubborn, hot, and Panic room, The villain stole millions of dollars in bearer bonds.

After the First World War, the use of bearer bonds for tax avoidance became more popular. Their illegal use continued until the Tax Fairness and Fiscal Accountability Act of 1982, which prohibited the issuance of new bearer bonds in the United States. Interestingly, Eurobonds are still issued in the form of electronic bearer bonds. U.S. companies can issue bonds to the European market in this form.

The future of bearer bonds

Most bearer bonds in circulation are issued when interest rates are relatively high. As a result, many bonds are recalled before the maturity date to reduce the issuer’s holding costs. Since a law in 2010 exempted banks and brokers from redemption liabilities, current redemptions are almost non-existent.

Frequently Asked Questions about Bearer Bonds

Are bearer bonds legal everywhere?

Bearer bonds are almost extinct in the United States and most other countries, because the lack of registration makes them very suitable for money laundering, tax evasion and any number of other improper transactions.

Is there any value in bearer bonds?

If you still own a bearer bond, you will not be able to redeem the bond’s interest value, but the paper certificate may contain some value as a collectible.

What is the purpose of bearer bonds?

For example, the United States issued bearer bonds during the reconstruction period as a way for the government to raise funds for various projects.

Will bearer bonds mature?

Although bearer bonds do not technically exceed the maturity date of maturity, bearer bondholders today will find it difficult to cash out their bonds because banks no longer need to fulfill the value of bearer bonds, and the U.S. Treasury Department has Stop issuing them.

What is the difference between bearer bonds and registered bonds?

Although registered bonds have written and electronic records of the bond owner and maturity date, bearer bonds are not registered as investment securities and there is no record of the owner of the certificate.

Bottom line

Bearer bonds are anonymous debt instruments that are easily transferable and have certain advantages over other forms of currency. But it is these characteristics that make bearer bonds a popular tool for criminals to circumvent the law. Therefore, the future of bearer bonds is still uncertain, and the bonds issued by the United States are going extinct.

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