What’s the point of bearer bonds and how do they work?
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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.
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