Complete Guide to Bearer Bonds

Bearer bonds as financial instruments trace their existence to times before the existence of digital banking. They were commonly used before the modern banking system that we know today.

Bearer Bond has two parts: Bearer refers to who physically holds the document, and bond refers to the legal contract to pay the amount. So the holder has a legal contract to be paid by the government.

Bearer bonds are no longer legal in the US.

Here, we shall go over everything you need to know about a bearer bond, including some security issues related to it, as well as the US Regulation limits on bearer bonds.

What is a Bearer Bond?

A bearer bond is a type of bond (i.e., a kind of fixed income security) that does not require any form of registration. Bearer bonds are similar to traditional bonds in the sense that they have a coupon interest rate as well as a maturity date. The rate of interest paid on the bonds is set by the government.

Understanding the Bearer Bond

Even though bearer bonds can be traced back several centuries, these bonds became extremely popular during the US Civil War. Now, however, bearer bonds are almost non-existent. However, bearer bonds have continued to hold significance not only in global finance, but popular culture as well.

Bearer bonds are not registered to owners, which means that the holder of a bearer bond is the owner of the bond. No personal information is stored to procure the bond, and therefore, people can obtain bearer bonds in relatively few transactions. This makes the bearer bonds anonymous.

A Reddit user, DragonFireCK, describes bearer bonds in the post below.

Mechanics of Bearer Bonds

Bearer bonds are much like any other debt instrument out there. They are issued by businesses and organizations, and various governments to raise funds necessary for growth and operations. Bearer bonds are quite similar to traditional bonds in terms of their mechanics. They have

A Maturity Date

With bearer bonds, there is a maturity date on which the bond owner gets back the invested principal. To receive this, the bondholder has to present the physical certificate to the bank. Sometimes, these bonds can be redeemed before the maturity date if they are ever “called” before completing the maturity date.

Interest

Bearer bonds come with coupons for every interest payment. Interest payments on bearer bonds are made at regular intervals by issuers. To claim interest, bondholders must submit a coupon to the issuer.

Bearer bonds, therefore, are essentially used to lend and borrow money, much like a mortgage or a bank does. This means that the lender can lend money in the form of bonds, and he/she will get repaid on the maturity date as well as the interest payments.

Issues with Bearer Bonds

Since bearer bonds are highly anonymous, there are zero records of who has sold the bond, who purchased it, and who is collecting interest. This means that bearer bonds are prone to security issues.

Let’s take a look at a few examples.

Tax Evasion

You don’t have to report profits from selling bearer bonds to the IRS. e.g. if you found a bearer bond or given one as a gift, the IRS has no way to know about that income. It is, therefore, easy for individuals to hide their assets and income and thus they can avoid paying taxes to the government.

Since it is easier for holders of the bonds to simply not declare their profits on bearer bonds, these bonds have been used by dishonest individuals to evade taxes over the years.

Moving Hidden Assets

With the kind of anonymity that a bearer bond affords, it is also easy for owners to not only hoard large amounts of wealth but also to move substantial amounts from one place to another. The exchange can take place through the purchase and sale of these bonds.

Loss Or Theft

The anonymity of bearer bonds makes it almost similar to cash. For instance, since there are no records attached to bearer bonds, there is no way in which you can recover it if you lose it. Disasters such as fires or floods can be devastating in terms of loss. The same holds for instances of theft. It is impossible to trace a bearer bond, which means that you might not get it back once it has been stolen. Coupons that have been lost in the mail also pose a problem for interest payments. The lack of documentation makes it difficult for the heirs of the owners of bearer bonds as well.

Forgery

It is easy for fraudsters to just print a bunch of fake bearer bonds and use them as real money. This is illegal and forgers face significant punishment if caught.

Money Laundering

Since it is easy for owners of bearer bonds to conceal the source of acquisition for the bonds, it is easy for them to carry out money laundering practices. All they have to do is enter the amount they have received through bearer bonds from a source that looks legitimate.

This is the reason bearer bonds do not really hold too many advantages for those individuals who are honest about their income and assets. These security issues are the reason why there have been numerous crackdowns by the government over the years, which have made bearer bonds obscure and a thing of the past.

Given the banking system has evolved, there is no use of bearer bonds to transfer money or carry them.

Cultural References to Bearer Bonds

In the movie Die Hard released in 1988, the lead antagonist of the movie Hans Gruber is trying to steal $640M in bearer bonds that yield 20% per year.

He was trying to steal those because he could have cashed them anywhere in the US while earning 20% on the uncashed one.

Because bearer bonds are non-traceable and income from selling could be hidden from the IRS, he could have flown under the radar.

US Regulation Limit Bearer Bonds

Bearer bonds can no longer be bought in the United States. In fact, it was in 1982 that bearer bonds were almost entirely eliminated in the country. This occurred with the introduction of the TEFRA Act of 1982, i.e., the Tax Evasion and Fiscal Responsibility Act, which got rid of several tax benefits and placed penalties upon those who used bearer bonds.

For a while after this, it was still possible for US issuers to provide foreign investors with bearer bonds. However, at this point, even that has been almost eliminated. In 2010, another law was passed in the United States that removed the responsibility that had earlier been placed on brokerages and banks to redeem old bearer bonds.

As such, it no longer makes sense for US citizens to buy bearer bonds at this point in time. Not only is it impractical, but you might be left with several issues (including not getting your interest and problems with the IRS). What’s more, as of today, registered bonds provide more favourable terms to owners than bearer bonds do.

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Conclusion

Bearer bonds were extremely popular at one point in time in the United States. However, because of the anonymity and various security threats that they pose, the US government has cracked down on bearer bonds and made them virtually obscure today. As such, the future remains uncertain for these bonds, and the current trajectory even points towards complete extinction.

Guide to Bearer Bonds FAQ

What are bearer bonds, and how do they work?

Bearer bonds are a type of debt security where physical certificates are issued to the holder (bearer) without recording the owner’s name. The holder of the physical certificate is entitled to receive the principal amount and interest payments upon maturity. These bonds are transferable by delivering the physical certificate.

How do I obtain a bearer bond?

Bearer bonds can be obtained through various means, including purchasing them from financial institutions, brokers, or individuals in the secondary market. Due to regulatory changes, the issuance of new bearer bonds has become less common in recent years.

What are the features of bearer bonds?

Bearer bonds have several distinctive features, including:

• Anonymity: The owner’s identity is not recorded, providing anonymity to the bearer.
• Portability: Bearer bonds are easily transferable, allowing for convenient trading and transactions.
• No Need for Registration: Unlike registered bonds, bearer bonds do not require the owner’s name to be recorded with the issuer.
• Physical Certificates: Bearer bonds exist as physical paper certificates, which must be kept secure.
• Coupon Payments: To collect interest payments, bondholders must clip and submit the coupons attached to the bond certificate.

Are there risks associated with bearer bonds?

Yes, there are risks, including:

• Loss or Theft: Bearer bonds are like cash and can be lost or stolen. Recovering them can be challenging.
• Lack of Ownership Records: If the bond certificate is lost, proving ownership can be difficult since there’s no record of ownership with the issuer.
• Tax Compliance: Interest income from bearer bonds is not automatically reported to tax authorities, which may lead to tax compliance issues.
• Declining Popularity: Bearer bonds have become less common due to concerns about their use in illegal activities like money laundering and tax evasion.

How do I redeem a bearer bond?

Bearer bonds can be redeemed by presenting the physical certificate to the issuer or a designated paying agent upon maturity. The bondholder will receive the face value of the bond and any unpaid interest.

What is the current status of bearer bonds in the financial world?

Bearer bonds have declined in popularity due to regulatory changes and concerns about their use in illegal activities. Many countries have phased out the issuance of new bearer bonds, and existing ones are subject to strict reporting and disclosure requirements.

Are there tax implications when holding bearer bonds?

The taxation of bearer bonds varies by jurisdiction, but generally, interest income from bearer bonds is subject to income tax. It’s essential to consult tax regulations in your country to understand the tax implications of holding bearer bonds.

What are the reporting requirements for bearer bonds?

In many countries, holding and redeeming bearer bonds may trigger reporting requirements to prevent tax evasion and illegal financial activities. Complying with these regulations is essential to avoid legal issues.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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