Bond Power: What It is, How It Works, Example

What is Bond Power?

Bond power is a separate legal form that authorizes the transfer of ownership of a registered bond from one party to another, without endorsing the actual bond certificate.

Understanding Bond Power

Essentially, a bond power document serves as a substitute for the assignment form that is printed on the back of a registered bond certificate. It formally appoints an attorney-in-fact to transfer the ownership of the bonds.

Bond power is also sometimes referred to as an assignment separate from the certificate. The separation of the authority from the bond certificate provides a measure of safety to the bondholder. The designation allows lenders to sell any securities pledged as collateral against the bond should the borrower default.

A bond power usually requires a signature guarantee to protect against fraudulent transfers. A signature guarantee is a form of authentication, issued by a bank or other financial institution (FI), which verifies the legitimacy of a signature and the signatory's overall request.

The bond power form typically includes:

• Previous owner's name
• Total number of bonds
• The bond issuer name
• Bond principal amount
• The bond certificate number.

In effect, a bond power document is more convenient than a registered bond certificate because it may be exchanged, mortgaged, or sold separately from the bond document it represents. A power of attorney is given to the named entity so they can provide the bond to whomever they wish.

In today’s digital marketplace, a retail investor will use a brokerage firm to buy or sell bonds and will rely on that firm to keep records of any legal documentation required for the transfer of the bond to the new owner. Most of the time the owner of a bond will not take physical possession of the bond certificate and does not have to complete legal paperwork to buy and sell bonds. 

Holding bonds as an electronic record with the broker's custodian eliminates the need for the physical possession of the bond certificate. However, before technology allowed the keeping of entirely electronically files, physical bond certificates were the norm. It was prevalent to use bond powers when transferring ownership of bonds from one party to another.

Bond Power Example

For example, when someone passes away, they often leave bonds as part of their assets. A bond power document would allow someone to sell or transfer certificates on behalf of the deceased's estate, provided they are a personal representative, beneficiary, or executor. If those assets are still in the market a grant of authority may be needed to access them. A bond power document can simplify that process.