Show I A A C B-C of Finance BONDS BONDS I BY B HAROLD F. F I GREENE Manager Bond D Department Guaranty Trust Co of New York l A shar shareholder in a a corporation I i is a n nI partner In Il the business Ho ito 10 accepts I the risks with tho the chances for tor tho the thoI gains and he lie has hus a voice olee In the thc se selection selection selection se- se I lection of the tho executives executive's s and in the determination of ot the broad policies oCI of oC I the c A bondholder r ls Is not an nit I own owner l' l but a a. creditor The rhe r ec certificate which ho holds is 18 l I In principle with th tho collateral note iia le may ma-i havo have accepted from oni om on one of or his hs cu customers cus cus- in lieu u oC ot cash payment I t. t J Just Junt Juntas aa IJ th the note nole gives 1 hi him n no ri right ht to la In- In in his customers customer's business 30 so long a. an it is solvent the toe bond ond gives him no nn right rICht to Interfere in th tho conduct con CO- duct dut cf f tho th corporation so o lon Ion long longas j jaa aa as tho Interest t Is la and the tho other terms of or the bond are compiled with Not only business and industrial l corporations cor cur issue bonds governmental units from from- townships s or up lo to national states put forth th their l a- a and pledge their good g faith falt tc t their payment Bonds Bond's of governments whose ability to pay is lJ beyond eo 1111 question ques tion lion are arc considered the safest Jarest form in in which capital can bt bb invested and In the interest 1 return Is lo low ion ionIn in general it might be he said ld that low tow Int rate rates on bonds usually in Indicate a a. well investment Such a statement t bov 0 1 ever Is subject s to this thi m modification n- n that bond In m matters of or rat 3 l' l ra as in oth other r features must inuit rn moet meet et the tite condition provan prevailing n in tho tue investment noney money market at th the tho time 0 of their Issue Government bonds hondt are usually HY I I I to pay y the tho cost cent of or largo large public rt r war the war the carrying through h o of which may rea reasonably bo ho 0 expected to increase increase- the taxable wealth or prevent It from froni shrinking and so 80 promote the tho 5 safety or prosper proper prosperity ity It- of or tho the state Tho The proceeds of or the sale bale of corporate b d are arc ordin ordinarily used for plant enlargement Installation lion tion of or ne new machin machinery r or other Tier per m ment nt or permanent near investment If It It were a u. mere merc matter ot of buying bu Taw raw material l from rain the the sale of which In Jn finished form the tho moncy money Invested I could b bi 5 quickly rel released e c an ordinary I I promissory note would he be sufficient Tho The tr n transaction In ouch a case CUIC would woul be lie a n matt matter r r for T the tho commercial commer bank hank er cr The Tho return from tile tio Installation of or new v machinery cr th tho building ofa of or ofa a n. now Is however a a. matter of or months or years Dank Bank loans Joana cannot C orlI In be made mad a In such cIuch circum- circum t l cr credit be he kept liquid an and and- therefore the Indus trial corporation must havo recourse I r to 10 tho the investing public which means it must issue bonds bond It Is evident however hoever that since nince the tue i issuance of ot other her her- hers s Implies a moral and Cation cf cr tho Iho most definite ant ami inc s capable character the corporation must mutt I be bc of ot tho the typo which hits has an all income I practically certain Iud real property I lor of high hl-h and approximately ly fixed value I Hence th the tho IS issuance J of ot bonds is more marc common wi with 1 railroads s and other public pub- pub lic utilities an I COt dealing I lit in certain commodities r rf r f prime primo tie no- such aa M steel and a few tew other metals rho Tho nearer the industry in ap In its Us business m methods the risks risk of ordinary undertakings tho the greater h the tile difficulty difficult It would have e in marketing Il Its Londs an and consequently the higher tho tue Interest rate It Il would bo be forced fOlce to offer At present many litany lJ b businesses are arc being financed by stock issues ACt After r the rate ruto has hajj been fixed upon thin tha i issuing corporation must decide upon the maturity as it Is la called ef tf Iii bonds to to tobe be bo offered Securities with a maturity of five the years or are ar usually called not bonds but bul notes Notes aro are common during periods of ot hl high h money rates when it ma may be Lc reasonably rca rea o expected that tho the rates will decrease l within a Low few ew ye earL So It H the tho curr current nt interest it rate rat v v. six or seven oen per cent tho the corporal Ion t tot not card to Issue year twenty r bonds bands If it there were a a. rc reasonable e expediency that tho rate rte would decrease e in a a. few yc years Other factors determining the maturity might be the maturity of previous pre pre- Ious Issues is tho the relation of tho the sinkIng sink sink- lag Ing fund requirements to tho the gross earnings R o of th the tho business and the general general gen gen- cn- cn eral ernt opinion as to business developments develop meats ments for the near future futuro The Tho remaining factor and one which is of or immediate importance to the in inVestor investor in- in vestor is the tho security offered Mort- Mort ort ort- bonds are aro those thosa which are aro ba backed ked b by a formally executed mortgage o othe on the property of or the Issuing corporation If It then the debtor falls faits to meet moot the obligations Imposed by the bonds ond either cither as to Interest pa rn maintenance of or a a. sinking fund if It such sucha I a n. fund Is called for by hr the tho term 0 of the bond hond or as to the payment or of the principal al when It IB Is finally due due- th the bondholders ma nay may take talo action through the trustees under tho mortgage c. c and andas andas as provided in the Indenture to safeguard safe safo- guard their Interests Thero may be first mortgage Cc bonds S second mot mortgage e a-e bonds s and other j Junior issues In such cases the claims of or the tue holders a of the I first mort- mort mortgage ge bonds are arc satisfied I first and those other othor of or the others in iii inI I ro rotation t a t IanNot Ian Not ut all bonds are aro secured by br morta mortgages mort mort- gages a Debenture ban honda bonds s arc are not nol so secured ac- ac I e-I cured a de debenture being by definition I Ian an unsecured d l promise prom Iso to Lo pa pay Some debentures de tIe- have however been secured I dO-I to their un under er mortgages sub subsequent I JS Issue lIe and still retain tho the original name rhe They ore arc sometimes used by corporations corpora corpora- I toils tOI which have hac mortgage bonds outstanding outstanding out out- j I standing whose whoso terms preclude the tho execution exe exe- I cution ulian of a second mortgage The fact j I that they arc are unsecured b by a n mortgage e of or cour course c does not nat necessarily impair their value Just as bankers would j I sometimes one mans man's unsecured noto note preference o over oer er tho the note of 01 an another another an- an II other amply amill hacked backed cl ed by so a I debenture bond hond hacked backed by the thc pledged faith of or a a. prosperous corporation may maybe ibo i t bo be fully as aa good baad if it not better belter investment invest invest- t-I t I merit ment than th the tho mortgage bond o or of A less tess fortunate o organization Owners ot ot ol de de- de I de-I ball bonds bondi 3 have bava tho the ri ht of or action I in tho the vent o a of failure to nice mee payments pay Jay meats ments but their ri rights arc second to I of oC holders of i mortgage e Lon bondsOn bonds J On sG several ral occasions occasion bon bonds s have lJ been I issued the Income front from which was wa not guaranteed ed c called so-called Income jop for tor or their earnings 8 on the tho company compau issuing them earning sufficient I cleat to pay tin Interest when due duc In Inthe Inthe Inthe the event cul of or a poor year ear holders hoders of or orI such bon bonds s receive no return on their theil I Investment lIt Inc Income me bonds take precedence prece I dence ov stock in ira the matter mat mat- I ter of ot dividend payments because as we wo have e ceen stockholders aro are owners 1 whereas bondholders arc aro creditors Of or I course If it the tile com company pan failed to repay the Ole principal when under tho tue terms of or orI the tue contract it H was due the thc holders I of Income bonds would have havo the same ame right lo 10 action as tho tito hul holders of or an any r lother other pledge Opportunity for or sharing in the growing grow grow- In iii ing prosperity of a corporation is sometimes offered to its bondholders b- b by bytho tho ho issuance of or what aro are known as convertible bonds Such bonds offer the holder at al his option and of at course I under tinder certain restrictions tho the right to 0 J 1 t turn In his bonds and take In return for thorn them f stock tock of tho the company common common cornmon com corn mon mon or 01 preferred according ta to the tho terms agreed upon If Ie a bond were bearing Interest t at 5 per cent and tho the comm common n stock stack were earning S per percent I cent the tho advantages cs of ot such a privilege I are arc obvious Of or course the bondholder I in such mch circumstances would have to I forego his rights as as creditor and accept the responsibilities of ownership Individual holders of ot any bond series ml might ht bo be an and usually are arc scattered over cr a large larbe territory so that common camman action for far tho protection of ot their Int in interests interests In- In t would bo II difficult to arrange und and perhaps Involve a great loss Joss of or time In order that interests of such bondholders may be properly cared card farat for far forat forat at al att times It in IH the custom in the case of or ca each caci h issue of ot bonds bomb to have havo a trustee usually a U trust company or 01 other or or- i I legally qualified to act in ina a a. trust capacity Tho The trustee In such sucha a caso case would be charged with willi the tho care of or tho the mortgage ac or whatever blanket instrument covered the Individual bond l Issued In Iii the event ovet q failure to meet Interest payments or pr other conditIons conditions conditions con con- called for f r b by tho the terms of or the bond or its Us covering instrument tho Uto trustee according to the terms terms- of or the Instrument would be and by law compelled to enter suit or take takeI whatever action tho the circumstances re re- re I The development o of oi trusteeship trustee trustee- r ship hh of or this character is one of ot the phases of or modern financial method I which make possible the thc large e scale I financial operations c with which we weI have havo become familiar I I Buyers of or bonds are arc often offered their choice between registered and anu anuI I coupon bonds Registered Reg-Isler d bonds are arc bon bonds s whose ownership is recorded with a registrar usually a batik bank or trust t company Interest payments aro are usually made by check drawn to tIle the ord order r of ot tho the owner as aa recorded and mailed malted or otherwise dispatched to ta him h by the corporation Itself or b by the bank or trust company y appointed to perform perform per per- form torm that thal service Registered bonds bands are arc thus practically secure against theft then and other loss toss for the they can be 00 r replaced if it necessary When ownership ownership owner owner- ship hip of oC such bon bonds s changes certain formalities mu must t be complied with and anda a record recard of ot the tho change ehan e noted on the books of or the tile r registrar Some Sarno bonds can only be he registered as to principal the interest being paid by means of or I I coupons coupon I Coupon bonds hands on the other hand bear attached to the certificate Itself a series l of coupons each rach of which detached and presented on the Interest date late to the corporation or to lo its ap appointed IoP- IoP pointed fiscal agent Is good for Car the Ule amount of interest called caned for Because man ninny many banks will collect coupons for Cor their customers upon payment o of a small collection charge they are arc frequently fre Ire deposited In a bank bant by a holder hold hold- er as currency or checks checks' ar are deposited No o record can bo be kept of ot the thc ownership ownership ownership owner owner- ship of or coupon bonds because thc they are mado made out to bearer and many change hands without restriction |