Finance

Bearer Bonds

Bearer Bonds

Bearer Bonds are the type of debt instrument which were introduced in the late 1800s by the U.S. government, in order to fund the reconstruction during the post-Civil War era. These are bonds that are not registered with any owner. Rather, the owner is someone who “bears” or has ownership of a bond and the interest will be transfer to that individual’s account. These instruments were issued by governments, companies, and corporations to meet their capital requirement in a short period of time.

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In short, we can say that the bearer bonds instrument is like a currency note whoever holds it can use it. The rate of interest and maturity date is stated on the bonds so when the bondholder goes to his bank on the maturity date, the amount of money will be transferred to his account. As there was no registration made for the owner of the bondholder, this made them convenient for financial crimes such as money laundering, tax evasion, other transactions underhand, and susceptible to robbery. Hence, the Tax Equity and Fiscal Responsibility Act of 1982 essentially terminated the practice in the United States of offering bearer bonds.

Example:

Say for example an individual purchases a bearer bond for Rs. 10,000 from a company with the interest rate or say coupon rate of 10%, thus the company will pay 10% on the face value of the bond i.e. Rs. 10,000 every year till the maturity date and the amount of interest payment will come to Rs.1000.

An individual can trade the bond according to his wish at a higher amount or at a lower amount to another party but the rate of interest will not be affected by this trade. From the day of transfer, the amount of interest will be debited to the other party account that is in the hold of the instrument.

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Advantages:

  • As this instrument is not registered under the holder’s name there is a risk but the advantage of this is that the holder can easily transfer his bond to other parties to make various payments.
  • With the help of bearer bonds, various companies and government can raise their funds easily.
  • There is no change in the interest rate until the date of maturity. Whatever change took place in the market the interest rate under these bonds will not get affected.
  • Their no risk on the principal amount of the bond has a long-term maturity date because on the maturity date the sum principle will be given back.

Disadvantages:

  • The biggest disadvantage of this instrument is there no registration of the owner and any who holds the instrument can earn the interest amount in their bank account.
  • Since 1982 U.S. government stop the issue of these bonds and if some investors have bonds with the maturity of after some years from 1982 and during this time period if the issuer bank is in no position to work in the market then the money of that investor will be gone.
  • As there is no registration of the owner on the bond there is no option for the nominee of the bond and in case of death of the bond owner, and where he keeps this bond is not known by his family member there is no chance of gaining the money bank.
  • If the bonds are issued by a particular company and within a few years the company is not in the position to carry out its operation then also the investor can lose their money.

Conclusion:

Bearer Bonds had various advantages over other security traded in the market as there were no frequent price fluctuations on the bonds, the rate of interest also remains the same till the date of maturity, and the amount of interest is also fixed on this instrument. These bonds are considered highly liquid assets for any investor because they can be traded easily as an individual who holds this bond is considered as the owner. But on the same time, a negative scenario of this bonds have created an imbalance in the market which affect the common public at last and this also leads to various illegal activity like money laundering, speculation, tax evasion, etc. and because of this government stop the issue of this bond.

 

Author: Charmi Mehta

About the Author: Charmi Mehta is currently pursuing MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.

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