Still, bearer bonds play a meaningful role in global finance and popular culture. Learn more about bearer bonds and how they work.
Anonymous Investments
Bearer bonds are bonds that are not registered to any owner. Instead, whoever “bears” (or has possession of) a bond is the owner. Also known as coupon bonds, bearer bonds feature coupons that bondholders remove and submit for interest payments. Bearer bonds date back to at least 1648, although they were undoubtedly in use before then. In the U.S., they gained popularity around the time of the Civil War, as reconstruction costs stressed government resources. As of now, bearer bonds are virtually nonexistent in the U.S., although there are limited exceptions. In contrast, most new bonds are “registered,” and financial institutions report ownership and interest payments to government officials. For example, when you earn interest from a savings account or a registered bond, your institution notifies the Internal Revenue Service (IRS) of your earnings.
The Temptations of Anonymity
Bearer bonds’ anonymity historically made them appealing in several ways.
Hiding Income
Hiding assets and income was relatively easy with bearer bonds. With no record of purchases and sales, it was easy to move money and store wealth. The physical bond certificates had high-dollar denominations (from $5,000 to more than $1 billion), making it easy to take substantial sums overseas and earn a significant income. Tax evasion was also relatively easy, as individuals could store money in bonds instead of mainstream financial accounts—and earn interest.
Money Laundering
Money laundering has been a problem with bearer bonds. To reduce crime, regulators rely on paper trails (or electronic records). But bearer bonds make it possible to hand over billions of dollars in a relatively small package. The money can later be re-inserted into the financial system from a legitimate-looking source.
Theft
Theft and forgery are tempting because bearer bonds are essentially one step away from cash. Thieves who stole bearer bonds could redeem the bonds and spend the proceeds with little risk of getting caught. What’s more, fake bearer bonds provided an opportunity for skilled printers to convert worthless paper into real money. For investors who don’t need to hide assets and income, bearer bonds now have few advantages. If they get stolen, there is no way to recover your money. Natural disasters and fires can also cause significant losses. As a result, it’s wise to store bearer bonds in safe deposit boxes and other secure, protected locations. But it’s probably safer to have a financial institution with redundant data backups track your ownership electronically.
U.S. Regulations Limit Bearer Bonds
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) effectively put an end to bearer bonds for U.S. citizens. TEFRA eliminated significant tax benefits and introduced penalties for using bearer bonds. For a while, U.S. issuers could still provide bearer bonds to foreign investors, but more recent legislation has limited their ability to do so.
Can You Still Buy Bearer Bonds?
In the U.S., bearer bonds are impractical. The IRS and other agencies may require that you inform the U.S. government about your holdings. There are also significant risks to buying bonds, including the risk of not getting paid (default risk) and the risk of theft. Instruments that facilitate money laundering and tax evasion may bring on problems that you don’t want to have. Plus, modern bearer bonds issued by developed nations can have less favorable terms than registered bonds.
How Bearer Bonds Work
Bearer bonds, like other bonds, are debt instruments. Governments, businesses, and other organizations issue bonds to raise money, which they use to fund operations and growth. When somebody buys a bond, they “lend” money to the issuer. Just like your bank or mortgage lender, they get repaid in two ways (assuming the bond’s issuer does not default on the obligations): the return of the principal and interest payments.
Return of Principal
Bonds have a maturity date when the buyer receives their original investment. With bearer bonds, the bondholder redeems the bond by submitting the paper that the bond is printed on. In some cases, bonds are “called” before their maturity date, at which point interest payments stop, and the bondholder redeems early. However, because bearer bonds are unregistered, buyers might not know when bearer bonds get called.
Interest Payments
Issuers pay interest periodically (annually, for example). Bearer bonds have coupons attached for each interest payment. To collect payments, bondholders remove a coupon and submit it to the bond issuer (or “clip coupons”).
