What is Bearer Bond? Benefits of Investing in Bearer Bonds

Bearer bonds are financial instruments that are anonymous, easily transferable bonds that belong to whoever holds them.

There is no registration, no names, just possession. While they once offered simplicity and privacy, today, they are primarily phased out due to regulatory concerns. Let’s understand the meaning of bearer bonds, how they work, and why they have become a relic of the past.

What is Bearer Bond?

Bearer bonds are fixed-income securities owned by the person physically holding them. Unlike regular bonds, bearer bonds don’t have the owner’s name recorded anywhere. This means they are anonymous, easy to transfer, and old-school in today’s digital world.

No one knows who owns them unless you physically have the bond. Although governments or companies issue these bonds, when they mature, the person holding them gets the principal amount plus any interest. If the government issues them, then they are called government bearer bonds.

The bond comes with little coupons attached. These coupons can be beneficial, as you can hand them in to earn interest. However, the bonds’ anonymity also makes them risky. If you lose the bond, there is no way to track it.

Bearer Bonds Example

Let’s understand how bearer bonds work with the help of an example:

Imagine buying a Rs 5,00,000 bearer bond from XYZ Corporation on March 1, 2023. The bond has a 5-year term and will mature on March 1, 2028. It offers an annual interest rate of 5%.

Interest payments are made semi-annually on March 1 and September 1, with the first payment due on September 1, 2023.

To claim your interest, you must hand in the coupon attached to the bond and submit it to the issuer on the payment date. You’ll hand over the bond certificate to redeem your principal when the bond matures.

Benefits of Investing in Bearer Bonds

Easy to Transfer

Transferring bearer bonds is very easy. Simply giving the bond certificate to someone else in person transfers ownership. This is a simple and quick means of transferring value because there is no need for documentation, registration, or intermediaries.

Privacy and Anonymity

One of the most distinct advantages of bearer bonds is their confidentiality. Since the bond does not require documentation of ownership, the identity of the holder is never disclosed. Because of this, it is ideal for individuals or corporations wanting to conduct sensitive transactions while ensuring their privacy is protected.

Steady Income Stream

Like other bonds, bearer bonds pay interest regularly, giving the bondholder a fixed income. The bondholder must clip and submit the accompanying coupons to earn interest, guaranteeing a steady and consistent revenue flow over time.

Less Risk of Capital Loss

In general, bearer bonds are considered low-risk investments. They signify the issuer’s debt commitment, and the principal is paid back when the loan matures. Because of this, they are safer choices than erratic investments like equities.

High Liquidity

Since bearer bonds are highly portable, they are very liquid. Bonds are an adaptable form of financing because the holder can readily sell them if he needs cash without unnecessary complications or delays.

Disadvantages of Bearer Bonds

Lack of Transparency

A bearer bond carries no name, meaning its ownership is not recorded. As much as this guarantees the owner’s privacy, it also opens the door to criminal activities such as money laundering or tax evasion. This is why many countries outlaw or restrict the use of bearer bonds.

Risk of Loss or Theft

Because bearer bonds are physical papers, they are vulnerable to loss or theft. If the money is taken, there is no way to reclaim it or prove ownership. Similarly, the bond and its value are lost forever if misplaced or destroyed in a fire or flood.

Potential for Counterfeiting

Because bearer bonds are susceptible to counterfeiting, substantial financial losses may result. In contrast to digital securities, confirming a bearer bond’s genuineness is challenging. This significantly increases investor risk.

Dispute Resolution is Challenging

Due to the absence of recorded ownership, ownership conflicts are almost impossible to resolve. The legal response is challenging since courts and law enforcement have trouble determining who the actual owner is.

Limited Liquidity

Bearer bonds are less liquid than modern-day securities. This is because locating potential buyers for bearer bonds in the secondary market can be challenging.

Conclusion

In several nations, including India, bearer bonds, once a prominent aspect of the financial world, have disappeared from circulation. Although they provide advantages like anonymity and ease of transferability, these are outweighed by serious concerns like theft, loss, counterfeiting, and heightened regulatory scrutiny.

In keeping with global initiatives to prevent financial crimes, legal improvements in India have successfully restricted the issuance and use of bearer bonds. As a result, people and investors are now encouraged to consider alternative investing options that emphasise security, transparency, and compliance with current financial regulations.