Bearer Bond

A bearer bond is a type of fixed-income security that is not registered in the name of the owner. Instead, physical possession of the bond determines ownership. Whoever holds the bond is entitled to the bond’s interest and principal payments, making them easily transferable without the need for any formal registration. Bearer bonds were once popular, but due to regulatory changes and concerns around tax evasion, they have become less common.

Importance of bearer bonds:

Anonymity: Bearer bonds provide anonymity to their holders, as the issuer does not maintain a record of the bondholder’s identity.
Transferability: Bearer bonds are easily transferable through simple delivery, making them convenient for investors who want a quick and easy way to transfer ownership.
Investment diversification: Bearer bonds allowed investors to diversify their portfolios by including fixed-income securities.

Types of bearer bonds:

Corporate bearer bonds: Issued by corporations to raise capital for various purposes such as business expansion, debt refinancing, or funding mergers and acquisitions.
Municipal bearer bonds: Issued by local governments to finance public projects like infrastructure improvements, schools, or hospitals.
Government bearer bonds: Issued by national governments to finance budget deficits, infrastructure projects, or other public initiatives.

Formula on bearer bonds:

The price of a bearer bond can be calculated using the present value formula: Price = C * (1 – (1 + r)^-n) / r + F * (1 + r)^-n where: C = periodic coupon payment r = discount rate or yield to maturity n = number of periods until maturity F = face value of the bond

Examples of bearer bonds:

Bearer bonds are now rare due to the regulatory environment, but historical examples include US Treasury bearer bonds and various bearer bonds issued by European corporations and governments.

Issues and limitations of bearer bonds:

Tax evasion and money laundering: Bearer bonds’ anonymity made them attractive for tax evasion and money laundering, leading to stricter regulations and their eventual decline in popularity.
Loss or theft: Bearer bonds are vulnerable to loss or theft, as physical possession is the only proof of ownership.
Regulatory changes: Regulations such as the US Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982 significantly reduced the issuance of bearer bonds by requiring interest payments to be reported to the IRS.
Decreased liquidity: The decline in bearer bond issuance has led to decreased liquidity in the market, making it more challenging to buy or sell these securities.