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 bondBondA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually..
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.
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% 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.
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:
- When there is a loss due to theft, destruction, etc. of the bond, it is almost impossible to recover it because the actual owners do not get their name registered on it. There is no recourse available in such cases.
- In case of the death of the owner of the bonds who has kept their bonds in some secretive location, the legal heirs would not be able to find the physical location of the certificates.
- Such bonds have been used for illegal causes such as money laundering, anonymous and unaccounted business transactions, tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. , etc. Because of these reasons, the Tax Equity and Fiscal Responsibility Act, 1982, has brought an end to the issue of these instruments in the United States of America. Along the same lines, many other economies have discouraged these bonds because of the illegal activities being carried on with the help of such instruments.
Limitations / Risks Associated with Bearer Bond
Some of the limitations are as follows:
- Tax evasion.
- Money laundering.
- Exploitation by criminals.
- Circumvention of law.
- Concealment of business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements..
- They are maintaining anonymity.
- Tracing the rightful owner is almost impossible.
- Determining the owner is not possible.
What are the Differences between Bearer Bonds and Registered Bonds?
|Sr.No||Bearer Bonds||Registered Bonds|
|1||Payment of interest is made to the person in custody of the bond.||Interest is paid to the lawful owner of the bond.|
|2||They are not registered in the name of the owners.||They are registered in the name of the owners.|
|3||No such provision.||Payments records are kept and are tracked by an agent.|
|4||They offer anonymity to the owners of the bonds.||Names of the owners are on record.|
|5||There is a risk of loss.||There is very little or almost nil risk of loss.|
|6||A 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.|
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. 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.
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 –