9. Determining Interest

In like manner, too, the question of interest the bond is to bear is important. Some investors prefer to pay more for a bond, a premium, or sum above par, and receive a high rate of interest, while others prefer a low rate and the purchase of bonds at a lower figure. This is often a nice question with bankers in putting a loan on the market - a question in which long experience and a careful study of the wishes of investors enables them usually to give an almost unerring answer.

Sometimes a bond is issued below par and bears a low rate of interest, the issuer as well as the investor believing it will rise in value. This is always taken into account by all parties to these transactions. Very often a bond is issued slightly below par and the prospects of the issuing company improves, or securities become scarce, and the price forewith advances. In the way of a general statement it may be said that all good investments have been steadily appreciating for many years, because the opportunities for investing money safely, in the judgment of investors, do not keep pace with the increasing amounts available for investment. The old law of demand and supply therefore comes into operation to enhance the value of securities.

10. Mortgages

Another way of effecting loans is by a banker to take himself a mortgage on the property and then issue bonds based on this security.1

11. Farm Mortgages

Besides large loans that are financed by banks and bankers, are many small ones, possessing the same permanent character. A few companies have succeeded in doing a business of this kind, making permanent loans chiefly on the security of real estate, and of selling them in essentially the same manner as loans for larger amounts. The details of the business are quite different, and it requires therefore a separate description.

1 See next Chapter, Sections 1 and 2.

The companies that engage in this business especially are known as mortgage companies, although many trust companies are similarly engaged. The practice is for such companies to send agents into various parts of the West, visit the farmers, and learn from them who wish to borrow and how much. In many cases the farmers apply for loans to the companies, which lend the money desired, taking a mortgage on the farms of the lenders as a security, very much like a savings bank. The mortgage or loan is not supposed to be for the full value of the farm, but only half its value, or a little more, thus leaving a wide margin for shrinkage in its value and security to the lender. Unlike the savings bank, however, the company sells the mortgage, making its profit in the way of a commission on the money received, and paying the balance to the borrower. The lender may pay the interest directly to the purchaser of the mortgage; or to the company, as may be agreed. If it is paid to the company, the latter sends the money to the holder of the mortgage.