Bearer bonds, also known as coupon bonds, allow the owner or “bearer” of the coupon to collect interest by presenting the clipped coupon to the issuer’s paying agent. Bearer bonds are extremely rare and were essentially eliminated by the Tax Equity and Fiscal Responsibility Act of 1982. According to the Bureau of the Public Debt, .14% of all outstanding marketable securities are in bearer form. Bearer bonds do not require the issuer’s transfer agent to record the bondholder’s name. Title to the bearer security passes on delivery. Bearer bonds are as liquid as cash and, when they were popular, were often used to shift ownership of corporations so as to minimize tax consequences. It was this attribute that led to their demise in 1982 in the United States.
Positive Attributes
Issuer’s Benefits Bearer bonds require less paperwork on the part of the issuer’s transfer agent than do other, similar securities. Since bondholder names are not recorded, the issuer does not have to send annual or quarterly notices, eliminating costs on the part of the issuer.
Bondholder’s Benefits Coupon bonds allow the owner to remain anonymous. Bearer bonds often pay at a higher interest rate because of the increased risk taken on by the bondholder.
Large investors can purchase vast numbers of corporate of federal bonds without attracting the attention of competitors. Bearer bonds are extremely liquid, and can be exchanged without the intervention of the issuer’s transfer agent. This type of liquidity is advantageous to prospective investors wanting to invest in international bond markets. Bearer bonds are no longer issued in the US; investors may want to consider investing in Eurobonds, which are usually in bearer bond form.
Negative Attributes
Issuer’s Loss Since bearer bonds do not require the issuer’s transfer agent to record the bondholder’s name, there is always a chance that fraudulent certificates will be presented for interest. Bearer bonds should have a unique appearance in comparison to other types of bonds, but should not show the coupon holder’s name.
Bearer bonds are difficult to call. If the issuer would like to pay back its debt early, and refinance at a lower interest rate, it is generally not an easy task to locate bondholders.
Bondholder’s Loss Bearer bonds are difficult to replace. Like cash, if destroyed, lost, or stolen, there is little that can be done to replace certificates. If the certificates are stolen, whoever possesses them can collect the interest from the issuer’s paying agent.
Where to Purchase Bearer Bonds
Bearer bonds have essentially been eliminated by the Tax Equity and Fiscal Responsibility Act of 1982; there are old issues that have yet to mature, but no new issues have been sold in the United States since 1982. Outside the United States, government treasuries still issue bearer bonds. The Bank of Sierra Leone is one government that still issues bearer bonds. On Monday July 24th, 2006, The Bank of Sierra Leone issued 8,824,750,000.00 Leone SLL, or 2,971,546.60 US Dollars, where one US Dollar is equivalent to 2,969.80 SLL.
Eurobonds are issued outside the US; they are typically in bearer bond form, and pay interest annually. These bonds are usually in US dollar-denominations, but can be in other currencies. Most Eurobonds are straight debt issues, but warrants and convertible Eurobonds are not unusual. Eurobond investors should be accredited investors, and able to withstand large fluctuations in the currency market. Eurobond maturities are usually shorter, and issue sizes generally are smaller than in the domestic market. The Eurobond market is essentially unregulated, and yields are less subject to government influence than in the US bond market.
Phony securities
Be aware of bearer bond security scams. The Bureau of the Public Debt reports that several bearer bond scams have taken place in the past few years. One such scam includes 3 Billion US dollars in bogus paper bonds that were smuggled into the US by way of the Philippines.
These bonds were supposedly sent to China in the 1930’s. The bearer bonds were allegedly sent to aid the government of Chiang Kai-Shek in its fight against the communists. These bearer bonds were purportedly shipped via airplane. According the scam artists, the plane carrying the “US Dollar Bonds” crashed in the Philippines. These bonds are now resurfacing inside the US and in the United Kingdom.
This investment article was edited by http://www.papercheck.com; copyright ? 2006 Bearer-Bond.com, All rights reserved.
Written By : Darren Shafae
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