The majority of bonds in the United States are registered securities, meaning that the issuer has a record of the person or people to whom it issued the bond. A particular type of bond, a bearer bond, is not registered. Anyone who has the bond can cash it. Because these bonds are so different from registered bonds, people sometimes aren't sure if they draw interest.
Bearer bonds do earn interest. They are similar to any other bond in that they have both a maturity date and interest rate. However, the amount of interest varies based on when the bond was issued and who issued it.
Bearer bonds traditionally had individual coupons attached to them. These coupons were notes that indicated the amount of interest the bearer of the bond was supposed to get. Normally, you could only present one or two coupons a year, but some issuers allowed more. Some issuers also allowed you to present more than one coupon at a time so that you still could collect your earned interest if you missed taking in a coupon for redemption. The fact that the interest was represented on individual coupons that you could physically clip from the bond led to the process of cashing in bearer bond coupons for interest payments being called "clipping coupons."
Because issuers entitled whoever held a bearer bond to collect both the principal and interest associated with the bond, bearer bonds have always been a problem in that they make fraud easy. There is virtually no way to trace the bond if it is lost or stolen, so there is always the risk that the original owner may not get the principal and interest to which he is entitled. The Internal Revenue Service had major problems with bearer bonds in that, due to the assumed entitlement of the bearer, institutions that cashed the bonds often did not require you to sign the bonds or coupons. The IRS thus did not have a way of proving you received the funds and that you subsequently should be taxed for those monies.
Because of the problems associated with bearer bonds and their corresponding interest coupons, in 1982 the United States made it illegal for any person or organization to issue new bearer bonds. You still may cash the bearer bonds and coupons you have, but there are regulations that dictate how the institution to which you take the bond must handle the documents. You must provide your name, address and Social Security number to the institution's representative to verify who you are -- institutions usually have you fill out a W-9 for this purpose. Doing this doesn't provide evidence you were entitled to the bond, but it does prove to the IRS you cashed it or related coupons.
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