What’s the point of bearer bonds and how do they work?
In: 9
How were Hans’ bearer bonds generating 20%???
There are two parts to “bearer bond”.
The more complicated part is “bond”, which is basically just an “I owe you” note. These are especially common for governments and large companies to use as loans, as they are a cheap way to take a loan if people trust they will be repaid. A typical bond will have two major parts: the principal and coupons. The principal is the amount you will be repaid at the maturity date of the bond, which is when the loan ends. The coupons act as interest and will often a bond will have coupons dated quarterly, semi-annually, or annually. Historically, these documents would have to be physically turned into the issuer to get payment, but today they are almost always tracked digitally and payment made automatically.
“Bearer” refers to, mostly obsolete, cases where the issuer would not track who owned the bond, and so whoever held the physical paper would be the owner. This requires a lot less cost on the issuer’s and owner’s behalf and may result in bonds not being reclaimed. It also means the bond can be traded almost like cash. Overall, it also lead to a lot of fraud and money laundering, resulting in most governments strictly regulating or outright banning such instruments. Today, nearly all bonds are registered bonds, which is the opposite of a bearer bond. Many modern bonds are also book-entry bonds, which removes the physical bond certificate and can only be done with a registered bond.
Bearer bonds don’t really have a point, they are just the way financial instruments were long ago (like cash where possession is ownership rather than having ownership recorded and tracked).
Bearer bonds worked by presenting a physical piece of paper which could be redeemed for the cash they promised to pay (so the owner would take them to a bank who would later present them to the US treasury). They’ve all long since matured today, so if you tried you would likely attract the attention of a lots of federal agents wanting to ask you a number of questions regarding why you have that bond, as the main use of bearer bonds is they’re a single piece of paper that can be worth many times the largest currency bill which makes them ideal for transactions where both parties don’t want the government to know anything about the transaction (like an illegal drug transaction).
The biggest reason for their existence was anonymity and ease of transference. They worked a bit like large denomination cash before digital banking, they could be exchanged between entities for large transactions (like if one company wanted to pay another millions of dollars, you could do it with a suit case of bonds vs. trucks of 100 dollar bills). But they were also anonymous so transactions could be kept secret from regulators, governments, and tax agencies.
Of course all the above reasons sound like… wait, you’re telling me these are kind of the perfect thing for commit fraud, money laundering, and organized crime transactions, and you’re be perfectly right. That’s why we (the US at least) have created so many laws regulating/eliminating them that they pretty much aren’t a thing any more (here).
Latest Answers