State and Municipal Bonds

Coupon and

Registered

Bonds

A generation ago it was common, more especially in the middle west, for municipalities to issue bonds to aid in the construction of railroads. The burden of the debts thus contracted bore heavily upon the people in many instances, and suits were brought by the taxpayers to test their validity. As a result of a decision of the Supreme Court of the United States that these bonds must be paid, several of the States passed amendments to their constitutions prohibiting towns or cities from voting bond issues in aid of railroads.

"Voluntary contributions may be obtained from the citizens, but municipal bonds - bonds that must be paid by the city or county - can no longer be issued in those states," for aid to railroads. - Cook.

Bonds issued by private corporations differ from those previously mentioned, chiefly in that they are as a rule secured by mortgage on the property of the company issuing them. First mortgage bonds are those which are a first lien against the property pledged for their payment. Second and third mortgage bonds arc similarly secured by second and third liens. In case of foreclosure the first mortgage bonds must first be satisfied from the sale of the pledged property. Then if there is a surplus the second mortgage bonds can be paid, in full or in part, as the case may be, and so on.

Income bonds are a peculiar class of obligations. They are usually secured by mortgage upon the property of the corporation, but they bear interest only in the event that the net earnings of the company, after satisfying prior liens, are sufficient to pay it. Unlike ordinary mortgage bonds, they cannot be foreclosed for failure to pay interest unless the net earnings applicable thereto should be willfully diverted and applied to other purposes. Interest on bonds of this class must, however, be paid out of the earnings before any distribution of profits in the way of dividends can be made to the stockholders of the company.