What Is a Bearer Bond?
A bearer bond is a debt security issued by a government or corporation. The bond is issued with no named owner, and whoever holds the bond can claim the interest payments and principal.
Bearer bonds are also known as “bearer securities” or “unregistered securities”.
Bearer bonds were at one point mostly used by large institutions because they offer a higher degree of anonymity than registered bonds. They also tend to be more expensive than registered bonds.
The main disadvantage of bearer bonds is that they are less secure than registered bonds. If the bond is lost or stolen, the holder has no way of proving ownership and may not be able to claim the interest payments or principal.
Bearer bonds were once very popular, but their use has declined basically to the point where they are no longer seen in the US market.
This has been true in the US since 1982 due to changes in the tax laws then via the Tax Equity and Fiscal Responsibility Act of 1982.
Bearer bonds’ lack of registration made them popular for use in money laundering, tax evasion, and other forms of financial crimes.
The History of the Bearer Bond
Bearer bonds were issued by the US government and large corporations through the late-1800s through the mid-point of the 20th century, but eventually fell out of favor.
Private investors were concerned about the potential vulnerability of the investment due to theft or loss. The government eventually outlawed them to stamp out money laundering and other underhanded financial activities.
Bearer bonds issued by the US government stopped in 1982 and all of those that had been issued have expired.
How Bonds Work Today
Owner names are recorded electronically and certificates are rarely issued. The holder’s name, Social Security number, and address are kept on file with the bond issuer.
When an investor wants to cash in a bond, he or she can do so by going through the process of redemption.
The investor contacts the issuer and requests that the bond be redeemed. The issuer then sends a check for the value of the bond to the named owner on file.
A registrar or transfer agent is responsible for keeping track of the entity of each registered owner of a stock or a bond. This is highly automated these days because of the sheer volume of transactions that take place daily.
UBS and Legal Issues Involving Bearer Bonds
In 2009, paid $780 million in penalties in a deferred prosecution agreement with the US DOJ after it helped US citizens evade taxes using bearer bonds.
Summary – Bearer Bonds
Bearer bonds were once popular debt securities, but their use has all but disappeared in recent decades.
They were used mostly by large institutions because they offered more anonymity than registered bonds.
However, their lack of registration also made them vulnerable to theft and other financial crimes.