Bearer Bond

A bearer bond, also known as a coupon bond, is a type of debt security that is not registered in the name of the owner. Instead, it is payable to whoever holds it (i.e., the bearer). Bearer bonds come with attached coupons that the bondholder must clip and present for interest payments.
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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

  1. 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.

  2. 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.

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

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