Bearer Bond Definition
A bearer bond is defined as fixed-income security that is owned by the holder instead of a registered owner. The bondholder has a responsibility of submitting the coupon interest payments, which are physically attached to the bond, to a bank for payment purposes and then redeem the physical certificate when the bond matures. These bonds are negotiable instruments which have a stated maturity date and coupon interest rate.
A Little More on What is a Bearer Bond
The practice of issuing bearer bonds in the United States was ended by the Tax Equity and Fiscal Responsibility Act of 1982. Other economies which are developed have also stopped the issue of these bonds because of their potential to be used for money laundering and tax evasion.
Factoring in Legal Issues
Since these bonds are not registered in the owner’s name, an individual can, therefore, buy large amounts of bearer bonds and submit the coupons for payment while remaining anonymous. In 2009, a multinational financial services company known as UBS was accused of helping Americans evade taxes using bearer bonds.
Another shortcoming of this bond is that the lack of bond registration offers little protection to the investor if the physical certificate is stolen because the custodians do not have the owner’s name on file.
Most owners of these bonds keep the certificate in the safety deposit box of a bank or in safe at home. Because of this, problems arise when the clipped coupons, being sent to receive interest, get lost in the mail. The bonds need to be delivered at a bank either in person or by courier.
Another problem is that they make it difficult for heirs dealing with the investment portfolio of someone who has died. This is because sometimes the elderly forget where the bearer bonds are located and do not provide instructions on where to find the physical certificates.
How Book-Entry Securities Work
Since almost all the securities are issued in book-entry form, they are registered in the investors name electronically and therefore there is no issue of a physical certificate. A registrar tracks the names of each registered owner and then ensures that the bond owners receive all interest payments, and the stockholders receive the cash and stock dividends. When this book-entry is sold, the name of the registered owner is changed.
References for Availability Bias
Academic Research for Availability Bias
- Accounting for non-interest-bearing currency: a critique of the legal restrictions theory of money, White, L. H. (1987). Journal of Money, Credit and Banking, 19(4), 448-456. This paper gives a conclusion of this theory that states that the difference between the rates of return of return on money and bonds is because of certain legal restrictions on private intermediation so that absence of legal restrictions would make the difference go to zero.
- Estimation of the black economy of Pakistan through the monetary approach, Ahmed, M., & Ahmed, Q. M. (1995). The Pakistan Development Review, 34(4), 791-807. This paper shows how the presence of a black economy causes distortions in the official estimates of the macro-economic variables such as income generation and rate of inflation and therefore the potential effect of economic policies cannot be adequately ascertained.
- Zero coupon bond arbitrage: An illustration of the regulatory dialectic at work, Finnerty, J. D. (1985). Financial Management, 13-17. This paper explains how structural frictions in the capital markets of the world can result in profitable arbitrage opportunities.
- Societal benefits of illiquid bonds, Kocherlakota, N. R. (2003). Journal of Economic Theory, 108(2), 179-193. This article provides a possible explanation of the importance of nominally risk-free bonds in monetary economies. It also examines the role of nominal bonds in enabling agents to engage in intertemporal exchanges of money.
- Overcoming the zero bound on nominal interest rates with negative interest on currency: Gesell’s solution, Buiter, W. H., & Panigirtzoglou, N. (2003). The economic journal, 113(490), 723-746. This article considers how two analytical models, Old-Keynesian and New-Keynesian, have an equilibrium where the nominal interest rates at all maturities are stuck at their zero lower bound.
- Beyond segmentation: The case of China’s repo markets, Fan, L., & Zhang, C. (2007). Journal of banking & finance, 31(3), 939-954. This paper attempts to find out the reasons behind the discrepancy between interest rates in China two repurchase agreement (repo) markets, the exchange-traded repo market, and the interbank repo market.
- Estimating the black economy through monetary approach: A case study of Pakistan, Hussain, M. H., & Ahmed, Q. M. (2006). This study explains how the presence of a black economy in Pakistan creates a critical misrepresentation of macroeconomic variables in official estimates which lead to the false determination and delusional impact of economic policies.
- Liquidity traps: how to avoid them and how to escape them, Buiter, W. H., & Panigirtzoglou, N. (1999). (No. w7245). National bureau of economic research. This paper gives various ways of avoiding liquidity traps and getting out of one. It states that unless there is an association of short nominal interest rates with significantly lower interest volatility, a lower average rate of inflation that is associated with lower expected nominal interest rates, raises the odds that the zero nominal interest rate floor will be a binding constraint.
- Overcoming the zero bound on nominal interest rates: Gesell’s currency carry tax vs. Eisler’s parallel virtual currency, Buiter, W. H. (2005). International economics and economic policy, 2(2-3), 189-200. This article explains that despite the lower bound on the short nominal interest rate in Japan having become a binding constraint, the conventional monetary policy has never been pushed to the where all the outstanding government debt and the current and anticipated future deficits are monetized.
- Negative nominal interest rates: Three ways to overcome the zero lower bound, Buiter, W. H. (2009). The North American Journal of Economics and Finance, 20(3), 213-238. This paper studies three methods used to eliminate the zero lower bound on nominal interest rates and thus for restoring symmetry to the domain which the Central bank varies its official policy rate.
- Proposed Uniform Commercial Code and Investment Securities in Illinois, Trumbull, W. M. (1956). Nw. UL Rev., 51, 424. This paper states that the most extended bill that awaits the attention of the Illinois General Assembly is the Uniform Commercial Code and explains the features of this code.
- Paper money but a gold debt: Italy on the gold standard, Tattara, G. (2003). Explorations in Economic History, 40(2), 122-142. This paper finds out the reason as to why Italy failed to move to official convertibility when it still used the gold standard, and it could have gained gold standard benefits at a low cost.