1. Mortgage Bonds

We have already seen how banks become interested in some of the financial operations of railway companies; they also participate in others, especially in negotiating loans for them, which are reserved for this chapter.

At the outset we will describe the various kinds of bonds issued by railway companies, beginning with mortgage bonds. These are notes or promises issued generally for the sum of $1,000 while the aggregate amount is determined by many conditions. They are payable to bearer, are negotiable, and are to be paid at a fixed date, - five, ten, twenty years, or perhaps longer, from the date of issue at a specified place. The interest is payable usually semiannually, and the bonds state what property is pledged for the payment of the principal and interest They also state the mode of redeeming them: how a sinking fund is to be created for that purpose, or how they may be converted into other bonds or perhaps storks.

They are signed by the president and treasurer, and in many cases by the trustees to whom they are made out, who must defend the rights of the bondholders should the company fail to fulfill its promises made in the deed of mortgage of its property to to trustees.

2. Security For Bonds

To secure these bonds a deed of mortgage is given of the company's property to trustees, and this deed is lodged usually with some well-known trust company to render the bondholders as secure as possible. This deed in effect is a conveyance of the company's property to the trustees as security for the bondholders, to which an important condition is attached; namely, that if the company fulfills its obligations to its bondholders, paying them interest on their money and the principal at the time and in the manner promised, then the deed shall be of no account; but if the company fails to execute its promise, then the trustees can take possession of the property described in the deed for the benefit of the bondholders, and sell the same or make such other disposition of it as the bondholders or the law may direct.

This is the most important of all bonds given by a railroad company. Often in building a railroad the shareholders advance a part of the money required, and mortgage the company's property for the remainder, which by virtue of the terms of the mortgage is a first lien thereon, consequently, if it is not paid, the bondholders, or the trustees of the mortgage for them, can take the property in payment of their debt as already described.

3. Subsequent Mortgages

In many cases several mortgages are issued by a railroad on the same property, but they are not of equal worth. Each mortgage issued is subject to the one or more issued before it. The first mortgage, which is the oldest of course in time, is the first lien, and the subsequent ones are liens in the order of age. If the property should be sold to pay the mortgagees, and the sum received was equal to the amount only of the first mortgage, the holders of the second or third mortgages would receive nothing.