Bearer bonds are considered easy to transfer but hard to find. Bearer bonds were once promised to enjoy complete confidentiality for investors around the world, but governmental campaigns have made them nearly non-existent in the United States. However, bearer bonds play an important role in global financial circles and popular culture. Learn more about bearer bonds and how they work.
Anonymous Investments
Bearer bonds are bonds that are not registered in the name of any owner. Instead, the owner (or “bearer”) of the bond is the actual owner. Also known as coupon bonds, bearer bonds contain coupons that bondholders can detach and submit for interest profit.
The Allure of Secrecy
The historical secrecy of bearer bonds made them attractive in many ways. Bearer bonds were able to easily conceal income and assets. Thanks to the absence of records for purchases and sales, it was easy to transfer money and store wealth. Paper bond certificates held high values (ranging from $5,000 to over a billion dollars), making it easy to transfer large amounts overseas and earn significant income. Tax evasion was also relatively straightforward, as individuals could store money in bonds instead of mainstream financial accounts and earn interest.
Restrictions on Bearer Bonds in the United States
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) ended bearer bonds for U.S. citizens. TEFRA eliminated significant tax benefits and imposed penalties on the use of bearer bonds. For a time, U.S. issuers could still offer bearer bonds to foreign investors, but recent legislation has restricted their ability to do so.
Can You Buy Bearer Bonds?
In the United States, bearer bonds are impractical. The Internal Revenue Service (IRS) and other governmental organizations may require you to report your holdings to the U.S. government. There are also significant risks associated with purchasing the bonds, including the risk of non-payment (risk of assumption) and the risk of theft. Instruments that facilitate money laundering and tax evasion can create problems you wouldn’t want to face. Additionally, modern bearer bonds issued by developed countries may have less favorable terms than registered bonds.
How Do Bearer Bonds Work?
Bearer bonds, like other bonds, are debt instruments. Governments, corporations, and other entities issue bonds to raise money that they use to finance operations and growth.
When someone buys a bond, they are “lending” money to the issuer. The issuer repays the principal and interest in two ways (assuming the issuer does not default on obligations): repayment of principal and interest payments.
Repayment of Principal: Bonds have a maturity date when the buyer receives their original investment. With bearer bonds, the bondholder redeems the bond by presenting the paper on which the bond is printed. In some cases, bonds may be “called” before their maturity date, ceasing interest payments and allowing the bondholder to redeem early. However, since bearer bonds are unregistered, the buyer may not know when the bearer bonds are called.
Interest Payments: Issuers pay interest periodically (annually, for example). Bearer bonds have attached coupons for each interest payment. To collect payments, bondholders detach the coupon and submit it to the issuer (or “clip the coupons”).
Sources:
– Yale News. “A Living Artifact from the Dutch Golden Age: Yale’s 367-Year-Old WaterBond Still Pays Interest.” Accessed Sept. 29, 2021.
– United States Department of Justice. “Two Colombian Nationals Arrested for Attempting to Sell Fraudulent $1 Billion U.S. Bearer Bond.” Accessed Sept. 29, 2021.
– Congress.gov. “Tax Equity and Fiscal Responsibility Act of 1982.” Accessed Sept. 21, 2021.
–
Congress.gov. “Hiring Incentives to Restore Employment Act.” Accessed Sept. 28, 2021.
Source: https://www.thebalancemoney.com/overview-of-bearer-bonds-4160421
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