Bearer Bond

What is a Bearer Bond?

A bearer bond is a type of bond issued by a company, a corporation, or government for which there are no records maintained about the ownership of the instrument, and whoever has the custody of the instrument is the owner of the instrument.

Examples of a Bearer Bond

The following are examples of a bearer bondBondBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more.

Example #1

Let us understand the meaning of the bearer bond with the help of a simple example:

Bearer bonds are like our currency notes. The moment we hold it in our possession, it becomes ours. For instance, while walking on a road, if we find a dollar, we pick it up, and it becomes ours with no validation required. The same is with the case of a bearer bond. Whoever possesses it owns it.

Example #2

Let us understand the working of the bearer bond with the help of another detailed example:

Say, Mr. K buys a $100 bearer bond of the Company ABC. The coupon rate on such bondsCoupon Rate On Such BondsThe coupon rate is the ROI (rate of interest) paid on the bond's face value by the bond's issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100%read more is 8%. ABC has to pay Mr. K an interest of 8% ($100 X 8%) on the face value of the bond. For receiving this interest amount, Mr. K has to untie the particular coupon from his instrument and present it to the agent of the company or the banker, as the case may be.

Even when the bond trades at an amount higher or lower than $100, the coupon payment will remain unaffected.

Bearer Bond

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Advantages of Bearer Bond

Some of the advantages are as follows:

  • Like any other fixed-income instrument, money raised by the issue of the bearer bonds is used to fund the growth and operations of the enterprises, government.
  • The interest payments are periodical. The coupons submitted to the agent or the banker are acknowledged immediately, and payment is made.
  • The principal amount of the bond is received promptly as of the date of maturity.
  • They are easily transferable.
  • Anonymity can be maintained.

Disadvantages of Bearer Bond

Some of the disadvantages are as follows:

Limitations / Risks Associated with Bearer Bond

Some of the limitations are as follows:

Important Points

Because of the limitations of the bearer bonds, securities are being issued in the book-entry form. That means the name of the owner is recorded electronically, with no physical certificate being issued. This cancels out the theft and misplacement limitations of the bearer bonds, ensuring that the actual owner receives the interest and dividend payments.

What are the Differences between Bearer Bonds and Registered Bonds?

Sr.NoBearer BondsRegistered Bonds
1Payment of interest is made to the person in custody of the bond.Interest is paid to the lawful owner of the bond.
2They are not registered in the name of the owners.They are registered in the name of the owners.
3No such provision.Payments records are kept and are tracked by an agent.
4They offer anonymity to the owners of the bonds.Names of the owners are on record.
5There is a risk of loss.There is very little or almost nil risk of loss.
6A bearer bond is just transferred without containing any name on it.When a registered bond is sold, a new bond is issued in the name of the new owner of the bond.

Conclusion

To sum up, bearer bonds, also referred to as coupon bondsCoupon BondsCoupon bonds pay fixed interest at a predetermined frequency from the bond’s issue date to the bond’s maturity or transfer date. The holder of a coupon bond receives a periodic payment of the stipulated fixed interest rate.read more or sometimes unregistered bonds, are the ones that belong to the current possessor of the bonds. They do not have the name of the owner written just like a currency note. Hence, the interest and the coupon payments are made to the bearer of the instrument. These instruments became the main reprobate in illegal activities like tax evasion, money laundering, etc. because of which it has been prohibited in many states. The better version of bonds, as stated above, would be the registered bonds, which are more prevalent now.

Recommended Articles

This has been a guide to what are bearer bonds, and it’s meaning. Here we discuss examples of bearer bonds along with limitations, advantages, and disadvantages. You can learn more about valuation from the following articles –

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