If you want to reap the rewards of a regular income in the form of bond interest payments, you may need to know the difference between bearer and registered bonds. Bearer bonds are payable to the holder, which may change frequently if the bond is sold or traded. Registered bonds belong to the owner of record. When a registered bond is sold or traded, ownership records are modified to indicate the transfer of ownership.
Registered bonds are rarely if ever issued in paper form certificates anymore. Instead, a bond registrar -- a person or agency that maintains records of ownership and provides transfer services -- uses computerized records to establish ownership. A bearer bond, on the other hand, is issued in the form of a physical certificate that is a negotiable instrument, meaning it can quickly be converted to cash. Therefore, a bearer bond in paper certificate form must be secured against theft or loss as no records of legitimate ownership follow the exchange of the bond.
Bearer bonds work similarly to cash in that the current holder can submit a coupon to the issuer to receive earnings when due. The owner can sell or trade the bond to another investor, who can in turn submit a coupon when the next interest payments are due and receive the earnings. Owners of registered bonds normally do not have to submit a request for interest payments. Instead the issuer or bond registrar knows the identity of the bondholder and will subsequently issue an interest payment to the registered owner of record at the interest due date.
Replacing Lost or Stolen Bonds
The issuer cannot replace bearer bonds if they are lost or stolen because no definitive records exist listing the identity of the owner. Registered bonds, on the other hand, can often be replaced if the certificate is lost or stolen because the issuer can verify the identity of the certificate owner. In some cases, a bearer bond can be converted into a registered bond, giving the owner more rights when interest payments are due and when the bond matures.
Federal laws in the United States changed tax treatment of bearer and registered bonds in the Tax Equity and Fiscal Responsibility Act of 1982. This law removed the option of tax-exempt bonds being issued in bearer form to the public unless the bond matured in one year or less. After this law went into effect, new issues of bearer bonds became less and less common in the United States, especially those of municipalities whose tax-exempt status is a significant attraction to investors. In addition, under the law the issuer cannot claim interest paid as a tax deduction, reducing the attractiveness of this type of debt obligation to public corporations.
Some Central American countries and companies still issue bearer bonds. Although a U.S. citizen could purchase this type of security, remember U.S. tax laws still apply when filing federal income tax. As with any investment, check with a certified financial planner if you are unsure whether or not this type of investment fits into your portfolio.
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