Most of us have encountered this situation: Person A, comfortable in his or her seat, gets up momentarily. Person B hijacks their seat in the meanwhile. Person A says, “But that’s my seat.” And person B says, “Is your name written on it?” Person A usually has no choice but to forgo his or her seat.
What are bearer bonds
Bearer bonds meaning:
Bearer Bonds work very much like this, in the sense that – as the name suggests – the bearer of the bond is the owner of the bond. Whoever holds the bond is the owner of the bond. A bearer bond is something like a bearer cheque that can be cashed by whoever presents it to the teller. Alternatively, it may be compared to hard cash. For example, a Rs 2000 note found on the street, now belongs to the finder. The person who lost it has no means to claim it.
Bearer bond definition:
Bearer bonds – unlike registered bonds – do not have a record of ownership registered with the stock exchange. A bearer bond may be issued by a company or by the government or a municipality or any other government entity.
The interest that is paid out on bearer bonds is also tied to the bearer bond because the bond comes with enclosed coupons. The bearer bond’s present owner had to pull out the coupon and submit it to the issuing company in order to receive the promised interest.
Bearer bonds example:
For example, let’s say Mrs Kumar has a bearer bond of Rs 5000, which gives out 10% interest. One day, she gives the bond to her nurse, Tina, who has been her caregiver for many years. There is no paperwork involved for the transfer and Mrs Kumar is happy about this because she won’t have to justify her generosity to greedy, meddling relatives. The next time the bond interest is to be received, Tina presents the coupon and receives Rs 500, although the bond value has dropped to Rs 4,500 in the meanwhile. Tina too is delighted with the anonymity and lack of paperwork because she is able to start saving up to get away from her abusive husband. Anonymity and lack of paperwork are the most favoured aspects of bearer bonds, but these attributes can have positive and negative connotations.
Benefits of bearer bonds
Easy to transfer
Today people are habituated to making instant remittances and instant payments. Bank accounts, trading accounts and demat accounts are opened in hours and credit can be availed of nearly instantly. A bond that can simply be handed over for instant and immediate transfer, with no need for paperwork or any other type of transaction, may be considered preferable for many investors.
There may be some transactions that command a great deal of secrecy. Maybe a person (or a company) does not want anyone on the payroll to know about an external consultant hired to audit their work, for example. Maybe a government or police department wants to hire someone to look into corruption in their organization but does not want there to be a paper trail to the person, should they be silenced or scared away by corrupt officials. Or maybe the situation is less dire, but nonetheless, one where the bond seller/giver and the bond receiver/buyer want to maintain secrecy for other reasons, like Mrs Kumar and her nurse Tina.
Like all other bonds, a bearer bond delivers fixed interest at regular intervals. This is one of the most popular features of bonds. Depending on the value of the bond and the interest amount, the bond owner could receive a sizable regular income from the interest payouts alone.
Less risk of capital loss
Bonds, as many of you may already know, are considered to be far less risky than stocks. That is because a bond represents a debt owed by the issuing company or government body to the bondholder. Upon maturity, the value is paid to the bondholder.
A bond can be sold should the bondholder suddenly find himself or herself in a capitalist crunch.
Disadvantages of bearer bonds
The same anonymity that can help maintain secrecy when paying off auditors and investors (or keeping greedy heirs at bay) can also help the unscrupulous to launder money with ease. Bearer bonds are in fact seen as a popular choice for money laundering and this is one of the reasons why they are banned in several countries.
Risk of capital loss still exists
Although a bond represents a debt owed by the issuing company or government body to the bondholder, the issuer can simply decide not to pay, especially if they had losses on the project or expansion that they borrowed for. Government bonds and muni bonds are seen as less risky because most investors do not expect the government to run off with their capital.
Potential of loss/ theft
If someone broke into your home and stole all your bearer bonds there would be no way to prove that they were yours, even if the thief is apprehended one day. Similarly, in a fire or flood or any other manmade or natural disaster, if the bearer bond is destroyed, it is lost.
Dispute resolution is challenging
Because of all the anonymity, disputes related to bearer bonds are challenging for courts and law enforcement because there is no way of establishing rightful ownership.
Bearer bonds can be very convenient but can also be easily stolen and lost.