Definition
Bonus bonds are bonds issued by a corporation to subscribers of its stock as an additional inducement or premium — a "bonus" — beyond the stock itself. The subscriber receives equity in the form of shares plus debt instruments in the form of bonds, effectively sweetening the investment package to attract capital. The bonds carry face value and typically an interest obligation, giving the investor a fixed-income component alongside the equity stake.
The practice was most common in the late nineteenth and early twentieth centuries, when corporations — particularly railroads and industrial enterprises — competed aggressively for subscription capital. Issuing bonus bonds was a way to enhance the apparent value of a stock offering without reducing the nominal share price.
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Common Language
Modern common usage (Wiktionary): "Bonus" in ordinary use means an extra payment, reward, or benefit given beyond what is expected or required.
Historical common usage (Webster's 1913): "Bonus" is defined as a premium or extra allowance; a sum given in addition to a stated compensation.
The common meaning of "bonus" maps loosely onto the legal term here, but the legal usage is more specific: a bonus bond is not merely any extra payment — it is a formal debt instrument (a bond) issued as a corporate inducement. The instrument carries legal obligations of repayment and interest, distinguishing it sharply from a casual gratuity or discretionary reward.
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Why It Matters in Research
Bonus bonds appear primarily in late nineteenth- and early twentieth-century corporate law materials, and researchers working in that period should expect the term in two distinct contexts: securities law and corporate capitalization disputes.
First, bonus bonds were frequently challenged as fraudulent or watered — issued without adequate consideration, inflating corporate debt beyond the company's actual capital base. Courts scrutinized whether the bonds were backed by genuine value, and litigation often turned on whether creditors or subsequent bondholders had notice of the bonus nature of the issuance.
Second, in regulatory and tax contexts, the treatment of bonus bonds as consideration for stock subscriptions raised valuation questions. Early railroad and industrial commission records, as well as state corporation filings, may use the term interchangeably with "bonus securities" or "premium bonds," which can cause indexing confusion.
Researchers should also note that the term largely fell out of common use after mid-twentieth century, when securities regulation tightened disclosure requirements and the practice of bundling bonds with stock subscriptions became less common. Modern equivalents — such as unit offerings or warrant-attached bonds — appear under different terminology. A search for "bonus bonds" in post-1950 materials will yield sparse results and may miss functionally identical instruments described in contemporary language.
The Fletcher Corporate reference cited in Bouvier's (§ 991) is the most direct treatise authority for the classical definition; researchers should consult Fletcher Cyclopedia of Corporations for surrounding sections on watered stock and overcapitalization for essential context.
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Historical Dictionary Support
Bouvier's Law Dictionary provides the sole entry among the standard shelf sources: "Bonds issued as a bonus to the subscribers to the stock of a corporation," with citation to Fletcher Cyclopedia of Corporations § 991.
The entry is notable for its brevity. Bouvier's does not address the validity of such bonds, their priority in liquidation, or the fraud and overcapitalization questions that in practice dominated the case law. The definition is accurate as far as it goes, but it treats the term in isolation rather than situating it within the broader concerns about corporate capitalization that made bonus bonds legally significant.
No entry appears in Black's Law Dictionary (earlier editions) among the provided sources, though the concept is addressed indirectly in overcapitalization and watered stock discussions in corporate law treatises of the same era. The absence from some standard dictionaries likely reflects the term's decline in practical usage rather than any ambiguity about its meaning.
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Jurisdictional Note
Bonus bonds were subject to state corporate law, and the validity and enforceability of such instruments varied by state depending on incorporation statutes and common law treatment of consideration in securities issuance. States with stricter anti-watering statutes were more hostile to bonus bonds issued without demonstrable consideration. Federal securities law, as it developed after 1933, imposed disclosure requirements that effectively curtailed the practice nationally.
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Encyclopedia Cross-Reference
contracts_168: Suretyship — Performance Bonds and Payment Bonds (Construction Context), The Law Mind Contracts & Commercial Law Encyclopedia. Note: the encyclopedia entry addresses a distinct category of bonds (surety instruments in construction), but provides essential background on bond mechanics and obligation structures applicable to understanding bonus bonds as debt instruments.
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