The question of the amount of bonded indebtedness fair to place upon property, fair to both the shareholders and bondholders, is a question deserving of much serious consideration. There is a general belief that the property of a corporation should only be mortgaged to the extent of its unchangeable value; that is, the minimum value of such property, as generally recognized, in a time of public adversity. Mortgaging a property to this extent would leave the shareholders to take the risk of the fluctuating value, and it is proper that they should do so, for, as a rule, the bonds on a property are expected to pay a lesser rate of interest than the dividend return to the shareholders. It is impossible to give any set rules here: each case will have to be judged upon its own merits. The amount of sinking fund must be taken into consideration, also the kind of property mortgaged. For instance, some properties depreciate through wear and tear much faster than others - street railways, for instance, more rapidly than electric light or gas plants. (This subject will be found more fully treated under the heading " Sinking Fund.")
In the case of municipal bonded indebtedness, a very prominent lawyer once made the statement that no municipality could ever stand a greater " net indebtedness " than 5% of its assessed valuation, and that is a very good rule to follow, but, like all good rules, it has its glaring exceptions; for instance, the assessed valuations of some Far West and Middle West communities are very much less, in proportion to the marketable value of the property, than here in the East (This is more fully set forth under the heading " Assessed Valuation "), and, in such cases, a greater net indebtedness than 5% might be fully justified.
Another thing to be considered is not to be influenced too much by the offer of a new issue at a figure below the par value - that is, at a discount. If a railway corporation sells an issue of bonds having 20 years to run, bearing 5% interest, and receives but 80 cents on a dollar for the same, the purchaser is prone to believe that the net earnings need to provide for only 5% on the bond issue, but when these bonds mature, 20 years afterwards, they must be paid off at par, or 20% in excess of the original selling price. This 20% must come from some source, and, therefore, it would be better for the purchaser to spread this 20% over the time which the bonds have to run, estimating the issue roughly, bearing, say, a 6% rather than a 5% rate; then, judge whether, or not, the corporation can stand such an interest charge. On the whole, it is better financiering for a corporation to issue its bonds at a rate of interest which will warrant their sale in the close proximity to par.