Sometimes referred to as a coupon bond, the bearer bond operates much like any other sort of bond. What is different is that the bearer bond is almost always an unregistered bond. Also, this type of negotiable bond has a difference when it comes to who received the benefit of the interest and the principal of the bond. Rather than the benefits being paid to the entity that originally purchased the bearer bond, they are paid to the person who is the holder. Here is some information about how the bearer bond works, and why the arrangement may be desirable in some cases.
Bearer bonds are accompanied with a series of coupons that are associated with the bond. Each one of these coupons usually represents a single interest payment that may be collected on the bond. The coupons are usually in the possession of the holder, who is free to present a single coupon periodically. Generally, a coupon may be presented for payment once or twice in a calendar year. The issuer of the bearer bond honors the interest payment and transfers the funds to the holder of the coupon.
As coupon bonds are unregistered bonds, they do not have to follow all the regulations associated with their registered counterparts. However, these negotiable bonds do have to operate within the parameters set down as part of the bond purchase. For example, if the terms of the purchase allow the holder of the bond to cash in a coupon every three months, the issuer is bound to honor that payment schedule.
In other cases, the details of the sale may also allow the holder to not cash in any coupons for a couple of years, and then present three or four at one time. If the terms of the purchase specifically allow for this sort of activity on the part of the holder, then it is possible to present multiple coupons at one time. Generally, however, the holder of a bearer bond can only present one coupon within a specified time frame.
While the bearer bond has been around for a number of years, the concept is beginning to lose some of its appeal. More investors are demonstrating interest in registered bonds as their negotiable bonds of choice. Considered to be a bit more stable and uniform in structure than the bearer bond, investors can manage to make a decent amount of interest from registered bonds, and do not have to be concerned with detailing the terms quite as much. With the unregistered status of the bearer bond, it is possible that this type of bond arrangement may eventually disappear altogether.