Bearer Bond
Definition
A bearer bond, sometimes referred to as bearer form or bearer paper, is a fixed-income security where ownership is not recorded in the issuing corporation’s books. Instead, it is issued in physical certificate form and is payable to the holder or bearer of the certificate. Interest payments are made to whoever has possession of the coupons attached to the bond, which must be presented to receive payment, hence the term “coupon bond.”
Examples
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Corporate Bearer Bonds: These are issued by corporations and function as debt instruments to raise capital. They are typically physically transferred when sold, making tracking the owner difficult. The bondholder claims interest by clipping and submitting the coupons on set dates.
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Municipal Bearer Bonds: Municipalities sometimes issue these bonds to finance public projects. Despite the associated risks due to their unregistered nature, they generally offer tax-exempt interest income.
Frequently Asked Questions (FAQs)
What are the risks associated with bearer bonds?
Bearer bonds carry the risk of loss or theft because whoever holds the physical certificate can claim the interest payments and, ultimately, the principal at maturity.
How can interest be collected from a bearer bond?
Interest on bearer bonds is collected by clipping the attached coupons and presenting them at a bank or other paying agency on the specified interest date.
Why are bearer bonds less common today?
Due to their unregistered nature, bearer bonds are susceptible to misuse, including tax evasion and money laundering. Increased regulatory measures and changes in the tax code have led to a decline in their issuance.
Can bearer bonds be converted into registered bonds?
While generally bearer bonds cannot be directly converted to registered bonds, some issuing entities may allow conversion through specific programs or replacements with modern registered securities.
Are bearer bonds legal?
Bearer bonds are legal in many countries, but due to regulatory and security concerns, their issuance is heavily restricted, and in some cases, they may be entirely phased out.
- Registered Bond: A bond whose owner is registered with the issuing entity, and interest payments are made directly to the registered owner.
- Coupon Rate: The interest rate stated on a bond when it’s issued, which represents the amount of interest paid to the bondholder.
- Principal: The face value or the original amount of the bond that is repaid to the bondholder at maturity.
- Maturity Date: The date when the bond’s principal amount is due to be paid to the bondholder.
- Yield: The return on investment for a bond, typically expressed as an annual percentage.
Online References
Suggested Books for Further Studies
- “Bonds: An Introduction to the Core Concepts” by Bill Bresnan and Eric Gelb
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Handbook of Fixed Income Securities” by Frank J. Fabozzi
Fundamentals of Bearer Bonds: Finance Basics Quiz
### What identifies the owner of a bearer bond?
- [ ] The owner's name on the bond certificate.
- [ ] A registration code with the issuer.
- [x] Possession of the bond.
- [ ] The owner's social security number.
> **Explanation:** The owner of a bearer bond is identified solely by possession. There are no records tying the bond to a specific individual.
### How does a bearer bondholder collect interest payments?
- [x] By clipping coupons attached to the bond.
- [ ] Through direct deposit by the issuer.
- [ ] Automatically through their brokerage account.
- [ ] By registering with the issuing company.
> **Explanation:** Bearer bondholders collect interest payments by clipping the coupons attached to the bond and presenting them for payment.
### What is the main risk associated with bearer bonds?
- [ ] Low interest rates.
- [ ] High volatility.
- [x] Risk of loss or theft.
- [ ] Increasing interest rate environment.
> **Explanation:** The primary risk is the potential loss or theft of the physical bearer bond, as it is payable to whoever holds it.
### Why have bearer bonds fallen out of favor with regulators?
- [x] They can be used for illegal activities like tax evasion and money laundering.
- [ ] They have lower returns compared to registered bonds.
- [ ] They are difficult to issue and manage.
- [ ] Investors prefer digital bonds.
> **Explanation:** Bearer bonds have fallen out of favor because their unregistered nature makes them susceptible to misuse, including tax evasion and money laundering.
### How are bearer bonds different from registered bonds?
- [x] Bearer bonds are not registered in the owner's name; registered bonds are.
- [ ] Bearer bonds offer higher interest rates.
- [ ] Bearer bonds have longer maturity periods.
- [ ] Bearer bonds can be converted into shares of stock.
> **Explanation:** Bearer bonds are not registered in any owner's name, making them different from registered bonds which have ownership recorded with the issuer.
### What feature makes bearer bonds known as "coupon bonds"?
- [ ] They have higher interest rates.
- [ ] They are paid in kind.
- [x] They have attached coupons for interest payments.
- [ ] They are issued with digital tokens.
> **Explanation:** Bearer bonds are called coupon bonds because they have attached physical coupons that must be presented to collect interest payments.
### Can ownership of a bearer bond be traced?
- [ ] Yes, through the issuing company's records.
- [ ] Yes, by tracking the bond's serial number.
- [x] No, ownership is not recorded.
- [ ] Yes, by monitoring bank transactions.
> **Explanation:** Ownership of a bearer bond cannot be traced because it is not recorded; ownership is determined by possession.
### What happens if a bearer bond is lost?
- [ ] The issuer cancels it and issues a new one.
- [ ] The bondholder receives a digital bond in replacement.
- [ ] A public notice is issued for its return.
- [x] It cannot be reclaimed; possession is key.
> **Explanation:** If a bearer bond is lost, it cannot be reclaimed because it is payable to the bearer, and ownership is tied to possession.
### What is a common use for bearer bonds historically?
- [x] For anonymity in financial transactions.
- [ ] Maximizing yields on investments.
- [ ] Holding in trust funds.
- [ ] As collateral for loans.
> **Explanation:** Historically, bearer bonds were used for financial transactions requiring anonymity, as ownership is not registered.
### Are bearer bonds still issued today?
- [ ] Yes, they are common worldwide.
- [ ] Yes, but only for corporate bonds.
- [ ] No, they have been phased out globally.
- [x] No, their issuance is heavily restricted due to regulations.
> **Explanation:** Issuance of bearer bonds is now heavily restricted due to regulatory and security concerns, making them much less common today.
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