What Are Bearer Bonds and How Do They Work?
Their popularity declined in the late 20th century due to concerns about tax evasion and money laundering. After the Tax Equity and Fiscal Responsibility Act of 1982, the U.S. government ceased issuing bearer bonds and took steps to require existing bearer bonds to be changed to registered bonds. Every time a book-entry security is sold, a transfer agent or registrar changes the name of the registered owner.
Old bearer bonds issued by corporations may or may not have retained their face value — even if the maturity dates have long since passed. While old bearer bonds continue to surface, it’s not clear how much value (if any) they have today. You may not even be able to redeem them at banks or other financial institutions anymore. A new 2010 U.S. law was passed to relieve banks and brokerages from responsibility for redeeming old bearer bonds. Unlike other types of bonds, bearer bonds do not have a record of ownership.
Investing in securities is highly regulated and every transaction is registered. Though bearer bonds served their purpose in the late 19th century and in 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 it is ensured that only the true owner of the bond will receive payment. Most owners of bearer bonds keep the physical certificates in a safe deposit box at a bank or in a safe at home.
- Bearer bonds can offer portfolio diversification by providing exposure to different issuers, sectors, and geographical regions, potentially reducing overall portfolio risk.
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Collecting the cash flows from instruments issued by corporations is not as easy and far from guaranteed. In 2010, U.S. law relieved banks and brokerages of the responsibility to honor bearer bond coupon payments and redemptions. If you find a corporate bearer bond, you can check to see if the company still exists or was taken over by another entity. By contacting the surviving company, you may be able to cash in the outstanding coupons and principal.
The Value of Bearer Bonds
In fact, many countries have phased out their use entirely or imposed stringent regulations on their issuance. They provide bondholders with the advantages of privacy and simplified ownership transfer through physical possession. Liquidity risk is higher for bearer bonds than registered bonds, as they are less frequently traded and may be more difficult to sell at a favorable price.
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Registered Bonds
As such, U.S. regulators took steps throughout the 1990s to discontinue bearer bonds. A registrar or transfer agent is responsible for tracking the name of each registered bearer bonds meaning owner of a stock or a bond. This ensures that bond owners receive all interest payments due or that stockholders receive their cash and stock dividends.
Bearer bonds can offer portfolio diversification by providing exposure to different issuers, sectors, and geographical regions, potentially reducing overall portfolio risk. Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments. But it’s probably safer to have a financial institution with redundant data backups track your ownership electronically. Bearer bonds once promised complete anonymity to investors worldwide, but government crackdowns have made them virtually nonexistent in the U.S.
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