Question

Although illegal to issue in the United States, a few European countries still allow bearer bonds to be sold, including Luxembourg, and they can also be found in some Central American and South American countries. Describe the differences between bearer and registered bonds? Why might an investor want to own bearer bonds?

Answer 1

Bearer bonds are issued in physical certificate form of ownership. However, no records of legitimate ownership are maintained for these type of bonds. The holder of this certificate is treated as legal owner and is paid the interest amount.

However, for registered bonds, as the name suggests, records are maintained about the ownership of such bonds. Most of these registered bonds are now electronic in nature and rarely issued in paper format now.

If we were to tabulate few or major difference between the two types of forms:

	Bearer Form	Registered Form
Issuance form	Physical certificates	Mostly electronic
Record of ownership	Not maintained	Maintained
Transfer of ownership	Does not require any transfer agent	Required a transfer agent in order to legally transfer the ownership
Interest Payments	Made to the one who present (hold) this bond, regardless of how he holds them – if he bought them or stole them.	Made to the registered owner of the bond
Tax evasion	Since no records for this are maintained, it is used for tax evasion purposes, even if the yields might slightly be lower	Proper records maintained prevent any tax evasion circumstances largely

One of the major reason for investing in a bearer bond would be to evade taxes. Since they leave little trail of transactions - interest payments, selling and buying - they are an easy tool to evade taxes. Also, in case if the investor wants to maintain secrecy or privacy around his ownership of assets, he can use bearer bonds. However, this privacy or secrecy maintenance is usually for the purpose of tax evasion or generally other things which are deemed illegal by regulators or government.