Bond Certificate: Definition, Format & Example

Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

For many years, bond certificates were issued to investors who purchased bearer bonds in the United States. This lesson will explore the financial history of bearer bonds and why they have been replaced with registered bonds today.

Bonds are IOUs

Joe and Tommy like to go to the convenience store and buy bags of snacks and candy. One day Tommy bought a lot of stuff but realized at the register that he didn't have the money to pay. So he asked his old pal Joe for a loan. Joe paused a bit and pulled out a sheet of paper. He scribbled a note that said I owe Joe $5 and made Tommy sign it. When Tommy handed it back to Joe he got money to buy those awesome snacks!

A bond certificate is just like that IOU from Tommy to Joe. Bonds are issued by governmental bodies and corporations to raise large sums of money. When investors buy the bonds they are providing the needed funds to the issuing body. In this situation, Joe is the investor and Tommy is the bond issuer, only he gave Joe an IOU instead of a bond. Either way it's a promise to pay back the money that was lent at a future date. Investors buying bonds also like to be paid interest for the time value of lending their money.

Bearer Bonds

At one time in American history, most bonds issued were bearer bonds. They consisted of unregistered bond certificates with information on the front and coupons attached that could be redeemed for interest payments. Whoever had physical possession of the bearer bond certificate had the right to collect the interest payments and principal.

A five-dollar baby bond certificate issued over 100 years ago by the state of Louisiana. Note the interest coupons on the right side
Baby Bond

The bond certificate usually had information on the front that included:

The issuer's name: The name of the governmental body or business issuing the bonds.

  • The face value: The amount the bondholder would be repaid when the bond matured.
  • Interest rate: The rate of interest the issuer paid the bondholders.
  • Maturity date: The date when the issuer would pay the bondholders the face value of their bonds.
  • Interest payment schedule: The dates when interest was paid, usually twice a year.

As America moved into the 20th century, bearer bonds were creating headaches. Investors needed to protect them by storing them in a safe deposit box, which added expense. There was little recourse for the investor if the bonds were stolen, since no records were kept. Interest coupons were getting lost in the mail and checks mailed to wrong addresses. Elderly investors were forgetting where they put their certificates!

This US Treasury Bond issued in 1979 is one of the last bearer bonds issued by the federal government
Treasury Bond

An even bigger problem with bearer bonds is that they were being used by criminal enterprise for money laundering. Ill-gotten funds could be used to buy bearer bonds with the criminal protected by their anonymous nature. They were also being used for evading US taxes by buying and then storing the bonds in overseas banks.

Registered Bonds

Finally, in 1982, the Tax Equity and Fiscal Responsibility Act ended the practice of issuing bearer bonds in the United States. Most other developed countries have since outlawed the practice as well.

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