2 An instrument by which a government, municipality, or corporation contracts and agrees to pay a specified sum of money on a given date (sometimes reserving the right for earlier payment), the bond itself being a coupon-bearing (or registered) note under seal; the coupons representing the quarterly, semi-annual, or annual interest, as the case may be, at a fixed rate.3 (See "Corporation Bonds.")
In the case of a "corporation bond," a mortgage is usually placed upon the property to secure the issue. In the case of the government or municipality, no mortgage is necessary, although sometimes certain revenues are pledged for payment of the principal, or interest, or both. The government or municipality, as a rule, simply issues its promise to pay under seal in the form of a "bond" as already described.
"Bonds" are issued by corporations, when sufficient money for the capital of same cannot be raised by the issuing of stock at satisfactory prices, or when, perhaps, the limit of stock which can be issued legally has been reached, and additional money is required. Again, suppose a corporation is enjoying very good profits, earning and paying, for example, 10% dividends upon its stock; it needs money for additions and extensions; to issue more stock would be equivalent to borrowing money at the high rate of interest of 10%, for that is what the stock issue already outstanding is returning to its owners. The company finds it is possible to sell bonds bearing 5% interest to raise the needed capital. It is expected that the increased capital will return earnings to the corporation not less than that already invested; viz. 10%. Consequently, by the sale of bonds bearing 5% interest, the difference between that and the expected earning capacity of the new capital, or another 5%, would accrue to the benefit of the stock already outstanding, and increase, therefore, the rate of dividends upon that stock.
1 United States Treasury Department Circular issued April 1, 1906.
2 Two men of finance once made the attempt to define a " bond " in the fewest possible words with this result: First, " Promise to pay under seal." Second, " Chosen action under seal." The writer offers these for consideration.
3 Cleveland, in his "Funds and Their Uses," distinguishes between a bond and an ordinary promissory note in this way: " The only way that. a bond is distinguished from an ordinary promissory note is by the fact that it is issued as a part of a series of like tenor and amount, and, in most cases, under a common security. By rule of common law the bond is also more formal in its execution. The note is a simple promise (in any form, so long as a definite promise for the payment of money appears upon its face), signed by the party bound, without any formality as to witnesses or seal. The bond, on the other hand, in its old common-law form, required a seal, and had to be witnessed in the same manner as a deed or other formal conveyance of property, and though assignable was not negotiable. This is still the rule within many jurisdictions."