Business, Legal & Accounting Glossary
Bonds can be issued in three forms, which differ in how they evidence ownership.
Bearer bonds are issued as an engraved certificate. The issuer maintains no records of who owns the bonds. Ownership is transferred by transferring the certificate. Whoever can produce the certificate is presumed to own the bond. Part of the certificate is a series of coupons, each corresponding to a scheduled interest payment on the bond. When an interest payment is due, the owner of the bond physically clips that coupon from the certificate and present it for payment. It is because of these coupons that a bond’s interest payments are called coupons.
The issuer of a bearer bond specifies a coupon clipping date for each coupon. Whether coupons are physically clipped on that specific date is not so important, but bonds trading for settlement by the coupon clipping date trade with the coupon. Those trading for settlement after the coupon clipping date trade without it. Accordingly, the coupon clipping date plays the role of an ex-coupon date.
Bearer bonds pose the risk that certificates might be lost or stolen. They also have a reputation for being attractive to criminals, who have used them to launder money or otherwise transfer large sums without leaving a paper trail. For these reasons, bearer bonds are no longer issued in the United States, and they are becoming less common around the world. Eurobonds are issued in bearer form.
Registered bonds are also issued as engraved certificates, but the issuer maintains a record of who owns each bond. The owner’s name and address are printed on the certificate. To transfer ownership, the current owner endorses (signs) the certificate and presents it to the issuer’s transfer agent. The transfer agent cancels the certificate and issues a new certificate to the new owner. In this way, the issuer always knows who owns bonds and can credit interest payments without a need for physical coupons. A drawback of registered bonds is the length of time it takes for the transfer agent to issue a new certificate. A trade can’t settle until the process is complete.
With book-entry, ownership of bonds is recorded electronically by a central depository. If a bond is transferred, the depository changes its records and provides a receipt for the transaction. Generally, brokers or dealers are listed as owners in place of their clients who are the beneficial owners. The broker or dealer maintains its own records of beneficial ownership. If it crosses a trade between two of its own clients, or if it is a counterparty to a client trade, the broker or dealer doesn’t even have to inform the depository of the transaction. Certificates are held by the depository. There is no real need for the certificates, but a single certificate may be held for an entire bond issuance. Due to its speed and efficiency, book entry is increasingly becoming the norm for bonds.
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Definitions for Book-Entry, Registered And Bearer Bonds are sourced/syndicated and enhanced from:
This glossary post was last updated: 17th April, 2020 | 6 Views.