Bearer bonds, also known as coupon bonds are bonds in which the physical certificate is held by the owner rather than being a registered security like bonds are today.
Due to the use of the bonds by people looking to avoid taxes or to fund criminal activity, they were banned in the US in 1982. The bonds themselves have coupons that need to be torn off and submitted to the company for payment.
It is believes that bearer bonds were first issued around 1865, post Civil War era to fund reconstruction. People preferred this instruments because they could be used to carry large amounts of wealth without having stacks and stacks of cash. They also were easily negotiated. However with the advent of computers electronic bonds are easily negotiated. Today there are many countries in Central America that still issue bearer bonds.
The risk of bearer bonds is that there are no names of ownership on the face of the bond. That means if you loose it there is no way to prove that the bonds did indeed belong to you. You are pretty much out of luck. Another risk of these bonds is that there is no insurance. Since there is so much time before they mature it is possible that the company may have gone out of business. If that happens you may have no legal recourse.
In one famous case, German banks backed by provincial governments and the government of Prussia issued hundreds of millions of dollars of bearer bonds in the 1920s to fund improvements in the agriculture sector. They have yet to pay a single interest payment of return of principal. The case has been locked up in court since 1958 when they were set to mature.
Nowadays if you have any bearer bonds you must set up an account with your social security number in order to receive your payments. You may have a hard time finding a banking agent to work with you in cashing them and may have to go straight to the issuer. When you send in a coupon, you may find they don't pay anymore because the bond was recalled. You wouldn't know it was recalled because the company had no way to contact bond holders.
At one time DTC, or Depositary Trust Company, the worlds largest securities depositary had 21 million bonds and 600 employees to meet the demand. Now they service a paltry 700,000 bonds.
Good luck to those of you who have debt instruments. You may want to look into cashing them in.
Here are some additional bond resources you may wish to access:
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