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 is owned by the holder, or bearer, rather than by a registered owner. The coupons for interest payments are physically attached to the security. The bondholder is required to submit the coupons to a bank or government treasury for payment and then redeem the physical certificate when the bond reaches the maturity date.

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 made them ideal for use in money laundering, tax evasion, and any number of other under-handed transactions. They also are vulnerable to theft. Nevertheless, bearer bonds are still issued in some countries.

Understanding Bearer Bonds

Bearer bonds are bonds that have no registration. These bonds are (were) issued by companies or governments and sold 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.

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

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, you can 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.

Old bearer bonds issued by corporations may or may not have retained their face value, even if the maturity dates have long since expired. 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 Today

Unlike the bearer bonds of the past, bonds are registered and tracked. Nearly all securities are now issued in book-entry form, meaning that they are registered in the investor’s name electronically. No physical certificate is issued.

A registrar or transfer agent is responsible for tracking the name of each registered stock or bond owner. 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 name of the registered owner. Obviously, this system is highly automated, or it would collapse.

The Bottom Line

As time has progressed, federal agencies have been 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 and 20th centuries, their lack of registration left them vulnerable to too much risk. Bearer bonds have been discontinued in many countries. Bonds issued today are registered and tracked, so it is ensured that only the true owner of the bond will receive payment.