What it means
A bond is a loan from investors to an issuer, evidenced by a certificate. With a registered bond, the issuer keeps a record of who owns each bond, pays interest to the registered holder, and requires a transfer to be recorded when the bond is sold.
With a bearer bond, possession is ownership. The certificate carries a series of dated coupons; on each interest date the holder cuts off the coupon and presents it to the issuer's paying agent for payment, and at maturity presents the certificate itself for repayment of the face value.
No names are recorded anywhere. The attractions were practical and, for some holders, less so.
Bearer bonds could be transferred by simply handing them over, without paperwork or fees, and could be pledged as collateral instantly. They also allowed holders to receive interest and capital without the issuer, the tax authority or anyone else knowing who they were.
That made them popular with people who wished to hide wealth from tax authorities, creditors, spouses or governments, and with criminals moving the proceeds of crime. It also made them dangerous to hold: a stolen or lost certificate was gone, since the thief or finder could redeem it and the true owner had no way to prove a claim.
Governments acted from the 1980s. The United States removed the tax deductibility of interest on new bearer bonds in 1982, which ended their issuance by US corporations and the Treasury; the last US Treasury bearer bonds matured in 2016.
The European Union and most other jurisdictions followed with restrictions, and international anti-money-laundering standards now treat bearer instruments as high risk. Some bearer bonds remain outstanding, mostly long-dated issues from decades ago, and a few jurisdictions still permit them, but they are rare.
Today bonds are issued in registered form or, far more commonly, in dematerialised form: electronic entries in a central securities depository, with ownership recorded through custodians. Transfers are instantaneous, interest is paid automatically to the recorded holder, and the audit trail that bearer bonds were designed to avoid is complete.
In practice
Real-world examples.
Example
A collector holds a bearer bond issued by a railway company in 1920 that was never redeemed, now valuable as a historical document rather than as a claim on a long-defunct issuer.
Example
A European investor holds a bearer eurobond issued in the 1990s, one of the last such issues, and presents coupons through her bank's paying agent each year.
Example
A law firm handling an estate finds bearer bonds in a safe deposit box and must establish their value and whether the issuer still exists before distributing them to heirs.
Think of it
“A bearer bond belongs to whoever holds it-like cash in bond form, with no registered owner.
Formula
Calculation
The mechanics of interest and value are the same as for any bond; only the payment mechanism differs.
Coupon Payment = Face Value x Coupon Rate / Number of payments per year
Bond Price = Present value of remaining coupons + Present value of face value, discounted at the market yield
Worked example. A holder owns a bearer bond with a face value of $10,000, a 6% annual coupon paid semi-annually, and three years to maturity.
- Each coupon = $10,000 x 6% / 2 = $300, presented as a physical coupon every six months
- Six coupons remain, plus the $10,000 principal at maturity
If the market yield for similar bonds is 8% a year (4% per half-year), the bond's value is:
- Present value of coupons = $300 x [ (1 minus 1.04 to the power minus 6) / 0.04 ] = $300 x 5.242 = $1,573
- Present value of principal = $10,000 / 1.04 to the power 6 = $10,000 / 1.2653 = $7,903
- Bond value = $9,476
A buyer would pay about $9,476 for the certificate, and the transfer would be complete on handing it over. If the certificate were stolen the following day, the thief could present the next coupon for $300 and, at maturity, the certificate for $10,000, and the original holder would have no record to prove ownership. The same bond in registered or electronic form would be worth the same $9,476, but a theft of the certificate (or of login credentials) would leave a trail and the registered owner's claim intact.Case study
Seen in the real world.
A family-owned company discovered, while clearing the office of a deceased founder, a bundle of bearer bonds with a face value of $500,000 issued by a foreign government in the 1970s. The heirs assumed they were a windfall. The company's advisers found that half the bonds had matured a decade earlier and the issuer's paying agent had long since closed the account, so the redemption claim had to be pursued through the issuer's treasury directly, a process that took eighteen months and required proof of legitimate acquisition under anti-money-laundering rules.
The other half had been called (repaid early) in the 1990s, an event the founder had evidently missed because no notice could be sent to an unknown holder; those bonds were worth nothing but the face value they had lost twenty years of interest on. The heirs recovered about $210,000 net of legal costs. The advisers' note observed that the founder had chosen bearer bonds for privacy and had paid for it with the difficulty of ever finding out what he owned.
Watch out
Common mistakes.
- Assuming an old bearer bond is worth its face value. It may have matured, been called or defaulted, and the issuer may no longer exist.
- Holding bearer instruments without secure storage and records. Loss or theft is total, and proving ownership afterwards is nearly impossible.
- Assuming bearer bonds can be freely bought and sold today. Most jurisdictions restrict them, and banks may refuse to handle them under anti-money-laundering rules.
Questions
People also ask.
Are bearer bonds still legal?
New issues are prohibited or heavily restricted in most developed countries. Existing bonds can usually be redeemed, subject to identity and source-of-funds checks.
What is the difference between a bearer bond and a registered bond?
A bearer bond belongs to whoever holds the certificate, with no record of ownership. A registered bond's owner is recorded by the issuer, and interest and principal are paid to that recorded owner.
What does clipping coupons mean?
Cutting the dated interest coupons from a bearer bond certificate to present them for payment. The phrase survives as a metaphor for living on investment income.
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