Bearer Bond: Definition, How It Works, and Why They’re Valuable

What is a bearer bond?

A bearer bond is a fixed-income security that the holder owns or bearer rather than a registered owner. The coupons for interest payments are physically attached to the security. The bondholder must submit the coupons to a bank for payment and then redeem the physical certificate when the bond reaches maturity.

As with registered bonds, bearer bonds are negotiable instruments with a stated maturity date and a coupon interest rate.

Bearer bonds are virtually extinct in the U.S. and some other countries, as the lack of registration makes them ideal for use in money laundering, tax evasion, and other underhanded transactions. They are also vulnerable to theft. Nevertheless, bearer bonds are still issued in many countries.

Understanding Bearer Bonds

Bearer bonds are bonds that have no registration. Companies or governments issue these bonds and sell them to investors to raise money. The owner of the bond certificate is the recipient of the bond’s payments and the bond value at maturity.

The U.S. government and corporations issued bearer bonds from the late 19th century, following the Civil War, into the second half of the 20th century. They fell out of favor gradually as they were outmoded by modern technology, shunned by investors concerned over their vulnerability to loss or theft, and discontinued by the U.S. government in 1982 under the Tax Equity and Fiscal Responsibility Act.

Redeeming Old Bearer Bonds

If you still hold old bearer bonds, there are ways to claim them. The U.S. government states that if you have bearer bonds, send the bonds and coupons to the Treasury using insured mail. You should also include payment instructions, primarily an address where the government can send the check. You will also need to include an IRS Form W-9.

Even if the maturity dates have expired, old bearer bonds issued by corporations may or may not have retained their face value. The holder of a corporate bearer bond can check for the name of the company that issued it and contact that company if it still exists or the company that bought it out if it was taken over. The bearer bond may be honored. How Bonds Are Issued and Registered TodayBonds today are tracked differently. Nearly all securities are now issued in book-entry form, registered electronically in the investor’s name. No physical certificate is issued. A registrar or transfer agent is responsible for tracking each registered stock owner’s name or bond. This ensures that bond owners receive all interest payments due and that stockholders receive their cash or stock dividends. Every time a book-entry security is sold, a transfer agent or registrar changes the registered owner’s name. This system is highly automated, or it would collapse.

As time progressed, federal agencies were created to protect investors through various regulations and monitoring. Investing in securities is highly regulated, and every transaction is registered. Though bearer bonds served their purpose in the late 19th century and the 20th century, their lack of registration left them vulnerable to too much risk. Bearer bonds have been discontinued, and bonds issued today come with registration, so that only the valid owner of the bond will receive payment.