Bearer Bond

What is Bearer Bond?

Definition

A bearer bond is a bearer or holder owned fixed-income security. Just like the bearer share which is a physical stock certificate owned by a current holder, a bearer bond is also owned by a current holder or bearer.

Understanding a Bearer Bond

Just like the bearer share, a bearer bond is issued to the holder in the form of a physical certificate. This physical bond certificate includes detachable coupons that can be used by the holder; it also grants the holder interest rates from the borrower. The coupons act as the interest rate of the bond, thereby, making the physical certificate worth more than just a piece of paper. In the mid-1980s, some financial institutions went as far as buying bearer bonds and selling off the coupons as separate securities which they called strips. Bonds are still very much popular in recent times, only that many investors would rather register electronically rather than in paper form.

To redeem the coupons, it would be required of the bondholder to submit the coupon(s) to their issuer. Anyone who holds a bond coupon and presents it to the issuer is entitled to the interest of the payment, regardless of whether or not the person is the true owner of the bond.

Register Bonds Vs Book Entry Bonds

Register bonds are the traditional bonds registration and certification that issue physical certificates to the owner. The physical certificate states the terms of the debt with coupons attached to it to enable the registered holder automatically receive interest payments from the issuer. While book-entry bonds are electronically registered bonds. Here the investor will receive a receipt for his/her bond rather than a physical certificate. They would also have their interests automatically credited to their account at their registered financial institution.