What are Bearer Bonds and How Do They Work?

Although carrying cash on you can be convenient and fun, you always take the risk of it being lost or stolen. Cash may be the most liquid of liquid assets, but the majority of people opt to keep their money safe in a bank and pay for goods and services using a debit card or check. Believe it or not, there used to be another physical monetary instrument with a similar value to cash but an even greater risk if it was lost: the bearer bond.

Bearer bonds are a throwback to a world with shoddy record-keeping and no computers. They act just like regular bond investments in which the bond issuer agrees to pay the bondholder the principal plus interest at the time of maturity. The main difference, however, is that bearer bonds have no “registered owner.” Instead, whoever is in physical possession of the bond will be treated as the bondholder and paid accordingly. There are even little coupons attached to the bearer bond paper that represent interest payments. Bearer bonds have rarely been used in the United States since the 1980s and are illegal in several other countries. Keep reading to learn more about their history and use.

Bonds are a type of fixed-income security and are one of the most important financial instruments in the world today. They are effectively a promissory note by the bond issuer to the bondholder. The bond issuer agrees to pay the bondholder their principal back plus interest when the bond matures. A bond contains these four elements:

A company or government issues a promissory note, a bond stipulating that they are issuing debt to be purchased by individuals or financial institutions.

The beneficiary of the bond is the bondholder. They can be individuals, companies, or financial institutions. In modern finance, the bondholder will always be the “registered owner” of the bond rather than the person or company in physical possession of a bond.

The bond issuer agrees to pay the bondholder an amount of interest on the borrowed principal.

The maturity date on a bond is the date when the bond issuer is due to pay both the principal and interest back to the bondholder.

Bearer bonds were first issued in 1648, but it wasn’t until the American Civil War that they became widely used. The U.S. government issued bearer bonds to fund the Civil War, which worked out well. Due to America’s success, many other countries in Europe and Latin America began issuing bearer bonds.

Bearer bonds work exactly like regular bonds, with one fundamental difference. In modern times, bonds have a registered owner that is backed up by an electronic system. Bearer bonds, on the other hand, have no registered owner. Whoever is in possession of the bond at the time can walk into a bank and redeem it. A bearer bond is the actual physical paper that represents the bond.

Most people use registered bonds, so they have never carried around or even seen an actual bearer bond. A classic bearer bond will have the following attributes.

The bond certificate is the actual promissory note or contract on official paper. As technology progressed, the physical certificate would incorporate extra anti-fraud security such as watermarks or a serial number.

There will be physical pieces of paper attached to the bearer bonds, which are the interest coupons. If the bondholder is set to receive regular fixed interest payments, then they will redeem each coupon from the bond issuer.

Bearer bonds haven’t been issued in the United States since the 1980s. The Tax Evasion and Fiscal Responsibility Act (TEFRA) of 1982 introduced government regulation that virtually eliminated bearer bonds. The act got rid of various tax benefits and introduced penalties for those that used bearer bonds. After 1982, it became virtually impossible to provide U.S. citizens with bearer bonds. For a time, there were a few bearer bonds still being issued to foreign nationals, but this was rare.

Although the U.S. stopped issuing bearer bonds, those who had bearer bonds could still exchange them, even if they were beyond their maturity date. This changed, however, with the Hiring and Incentives to Restore Employment Act under the Obama administration. This mostly ended the practice of issuing bearer bonds to foreign investors as it eliminated certain protections. The government also gave the OK to allow companies to stop honoring past bearer bonds. Today, bearer bonds are kind of like the typewriter. They were extremely useful at one point, but as technology progressed, they fell out of favor.

Here are some of the other reasons you don’t see bearer bonds anymore.

Bearer bonds have no registered owner and thus are an ideal way to facilitate money laundering. A drug cartel could use its proceeds to purchase bearer bonds and send in minions to exchange them for cash. Bearer bonds are one of the most anonymous financial instruments, and anonymity can be utilized for all sorts of dubious acts in the eyes of the U.S. government.

Losing a bag of bearer bonds would be the same as losing a bag of cash. Unless you have some strange insurance policy, chances are if you lose your bearer bonds, you will never get them back. As you can’t walk into a restaurant and pay your bill with bearer bonds, they have all the downsides of carrying cash with none of the transactional upsides.

If grandpa had a stack of bearer bonds that he buried in his 10-acre mountain property, you better get your shovel ready. If he passes, there is no way to legally pass the ownership of the bonds to heirs without the physical pieces of paper.

Bearer bonds were a favorite of people involved in various pursuits that might require money laundering. Drug cartels, terrorist syndicates, and fraudsters would many times launder money through bearer bonds because of anonymity. As bearer bonds were phased out in the 1980s, prospective money launderers would search high and low for another anonymous financial instrument. They received one in the 2000s with the advent of cryptocurrency.

Although cryptocurrency is more anonymous than most forms of currency, it’s not as anonymous as a bearer bond. In reality, law enforcement has been able to more or less crack the code to track the movement of crypto. Remember, every transaction of crypto is recorded on a public ledger. This, coupled with ties to “crypto wallets” by different people, has caused crypto to be considered less anonymous than it once was. Therefore, crypto is not the new bearer bond.

Looking to include a more diverse set of bonds in your portfolio? It’s important to speak to an advisor, so you can understand upcoming trends vs. reliable investments. Compare the services of these investment advisors.

In the U.S., it’s extremely rare to find bearer bonds. The U.S. Treasury no longer issues them. But you may still find them in other countries.

As long as you can find a bank that is willing to cash the bearer bond, then yes, anyone who possesses the bearer bond can cash it. They just have to be over age 18 and have a valid ID.

A bearer bond’s value can go up or down, just like the value of a registered bond. As you can’t buy bearer bonds anymore, old bearer bonds are the only ones still in existence. Their worth is determined by the value of the security.

If you do have a bearer bond, you will go to a bank or financial institution in person to cash in such bonds. The bank will make sure it’s legitimate, as there have been cases of fake bearer bonds in circulation.