Bearer bonds contrast to registered bonds. The plain vanilla bond in the example is a registered bond meaning that the name of the investor is printed on the certificate and that a register of owners is maintained. The register has two purposes: proof of ownership (together with the certificate) and the payment of interest to the registered owner.
Originally only the issuer maintained the register of owners. Later certain banks offered the service of maintenance of the register and change of registration of ownership; these services were utilized by most issuers. Later on these service providers became known as Transfer Secretaries.
With the advent of immobilization and dematerialization and the existence of a Central Scrip Depository (CSD), these Transfer Secretaries are now known as CSDPs (CSD Participants)”. With immobilization, bonds are immobilized in the scrip depository and an electronic register is maintained by the CSDP and the CSD and these evidence ownership. The CSDP sends confirmation of ownership to investors on a regular basis. With total dematerialization, the same situation prevails but no scrip is deposited in the CSDP.
Transfer of ownership of registered bonds is accomplished by the completion of a Securities Transfer Form (CTF – also called transfer deed). This CTF is usually prescribed in terms of the statute that regulates companies / corporations.
In the case of bearer bonds, none of the above applies, i.e. the name of the issuer is not placed on the bond, and neither is a register kept. Proof of ownership is the physical bond itself.
The bond term coupon emanates from the bearer bonds issued in the distant past. Attached to the certificates were perforated coupons on which the amount of interest was printed. On interest dates these coupons were detached and presented to the issuer to honour. An example is provided in Box 218 (note the coupons on the right of the certificate).
Transfer of ownership of bearer bonds took / takes place by exchange of the certificate for funds. It will be apparent that a higher measure of risk attaches to bearer bonds, which is why they are no longer issued in the developed markets.