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   Chapter 41 BONDS No.41

Up To Date Business By Various Characters: 4981

Updated: 2017-12-06 00:03


When a country borrows money it gives a guaranty that the money will be returned at a particular time and that interest will be paid at regular intervals at a fixed rate. This guaranty is called a bond. In actual practice, instead of borrowing the money required and then giving bonds for its return, countries usually issue the bonds first, and sell them to the highest bidder. For instance, if our government needed to borrow $1,000,000 it would issue bonds for this amount, stating definitely the rate of interest to be paid, and call for bids. If the rate of interest were four per cent. and a buyer paid more than $1000 for a $1000 bond he would, of course, make less than four per cent. upon his investment. Such bonds are absolutely safe and always marketable on account of our strong financial standing among the nations of the world. Similar bonds are issued by States, cities, towns, school districts, etc. They are not mortgages in the ordinary sense, and their worth consists entirely in the ability of the issuer through its taxing power to meet the obligations incurred. Municipal bonds are issued by cities and other municipalities to raise money for local improvements.


A bond is evidence of debt, specifying the interest and stating when the principal shall be paid; a certificate of stock is evidence that the owner is a part owner in the company, not a creditor of the company, and having no right to regain his money except by the sale of the stock or the winding up of the company's business. Bonds issued by stock companies and corporations are really mortgages upon their resources. Such a bond is usually secured by a mortgage upon the company's plant, franchises, and assets, or some part thereof. Corporate bonds can only be issued by the consent and direction of the shareholders of the company or corporation.

At the present time a mortgage securing the payment of corporate bonds is usually placed in the hands of a trustee-generally some trust company-which is supposed to act in behalf of the bondholders as a unit and which is empowered by the language of the bond, in the event of the failure of the corporation to perform the obligations it assumes in said bond, to foreclose the mortgage and divide the proceeds of sale among the bondholders.-Carroll.


Corporation bonds are of many classes, differing widely in their value as securiti

es. Only a few of the more important classes can be mentioned here. First mortgage bonds constitute, as the name implies, a first lien upon the property of the company issuing them. It is important in estimating the value of such securities to know whether they include only the property of the corporation at the time the bonds were issued or whether they are so worded as to include all property owned or acquired by the corporation. Second and third mortgage bonds are second and third liens. The interest upon second and third mortgage bonds is paid only after the interest upon first mortgage bonds is satisfied.

When bonds are issued to take up and put into one fund all previously issued mortgage bonds, the new bonds are sometimes called consolidated mortgage bonds. Holders of previously issued bonds are not obliged to exchange them for any new securities.

Income bonds are usually secured by a mortgage on the earnings of the corporation issuing them. Interest on such bonds must be paid before dividends are declared to stockholders. It is customary when such bonds are issued to set aside a percentage of the earnings as a sinking fund to meet the bonds at maturity.

Bonds are issued against all conceivable kinds of securities. Not only are properties of many kinds used to issue bonds upon, but many kinds of bonds are often issued upon the same properties. This is especially true of railways, where mortgages of various kinds often lap and overlap in almost endless confusion.


Money set aside by a municipality or corporation to sink a debt at a certain future time is called a sinking fund. For instance, if a city should issue twenty-year bonds for $100,000 to secure money for street improvements the entire debt would fall due in twenty years, but to avoid having such a large amount fall due in one year, a proportional sum is set aside each year as a sinking fund-that is, to sink, or reduce, or wipe out the indebtedness when the bonds mature. Bonds are not paid in advance of maturity.


Specimens of interest coupons.

Most bonds have interest coupons attached. These are cut off and presented for payment as they mature. For instance, a four per cent. bond for $1000 would draw $40 interest yearly. This sum would be paid in two instalments of $20 each. If the bond were for twenty years there would be at the date of issue forty interest coupons, each calling for $20 and collectable at intervals of six months.

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