But a bond is even more than this. In the old common law sense of the word, a bond signified an obligation to perform an act, and in the event of failure to do so, there was provision for the forfeit of something to compensate for damages sustained.
This is true of investment bonds, which are secured by a lien against property which would be forfeited in case the obligation were not met. In the case of Government and Municipal bonds there is no direct lien against property, but there is a lien against taxes levied upon property and, as everyone knows, taxes must be paid or else property forfeited. Therefore, all investment bonds are secured either directly or indirectly by a lien against property. The return of the principal sum at a definite date and the regular payment of interest at a fixed rate are set forth in special agreements in the bond, which also usually provide penalties in case the agreements are not carried out.
Finally, an ideal investment must have the qualities of convertibility. That is, it should be of such character and in such form as to permit of sale for cash if this should be desired, or of its use as collateral for a loan at a bank in case the investor needs to borrow money. In this great age of public improvements and general business on a huge scale requiring large sums of capital, money is borrowed for such projects in large amounts. At the same time, in order that these loans may be available to all owners of money, large or small, a big loan, or bond issue, is divided into many smaller parts, and one of these parts is a bond. For example: an issue for one million dollars may be divided into one thousand parts, or bonds, of 31,000 denomination each; or perhaps 2,000 bonds of $ 500 each, or even 10,000 bonds of $ 100 each. In other words, such a bond issue may be compared to a huge farm mortgage, divided into many parts, each part like a separate mortgage. Therefore, a bond is a negotiable instrument, so prepared as to be readily recognized at banks and in the market places of the world as a part of a loan of real worth and definitely secured as to repayment of principal with interest.
On pages 12 and 13 we have reproduced a specimen copy of a bond. From this picture it will be seen that the bond is a specially prepared document, usually engraved or lithographed on very fine paper, so that it will not wear out with years of handling. The wording on the bond states just what the bond is; when the promise to pay will fall due; where the principal is payable, and in what kind of money; when, where and how the interest is to be paid, and how much it is; and what the provision is for prompt payment of principal and interest.
In the reproduction of a bond on page 13 will be noticed a number of small ticket-like divisions or coupons. The reading matter on such coupons states that so many dollars of interest on the bond for a year or half-year or quarter-year will be due on a certain date and will be payable at the place indicated. When these coupons fall due, the owner of the bond clips them off and presents them for payment. If he is some distance from the place of payment he may collect his interest by mail, or, more easily, he may deposit his coupons at any bank for collection.