At first thought, it would seem that there were nothing to be said upon this subject - that stocks have no fixed maturity and that every bond matures upon some definite date. But there are many exceptions to the above. In the first place, stocks are not necessarily irredeemable - or without maturity - many of them, particularly preferred stocks, may be redeemed by the issuing corporations; usually upon some definite notice, such as 60 or 90 days, and, customarily, at a premium, although stocks redeemable at par exist. Such callable stocks may be redeemable as a whole, or, in part, by lot.
Upon the other hand, it is not unusual for bonds to be issued in perpetuity; in fact, it is the common practice in Great Britain, in certain classes of financing, and we have one example in the United States, at least, in the case of the Lehigh Valley Railroad Co., which, in 1873, brought out an issue, part of which are known as " perpetual annuity bonds." These do not mature unless interest is defaulted. (See "Called Bonds.")
There is another condition, which is really the important one to consider Under this subject, viz.: that of a bond redeemable at a premium. A great many issues are so put out, especially that portion of the issue subject to redemption before the actual maturity of the issue. Again, one occasionally encounters bonds, which, although falling due upon a fixed date, mature at a premium, say at 105. In such cases, in order to determine the income yield (see "Net Return upon the Investment"), the redemption price must be taken into consideration. With an understanding of the subject in parenthesis, just referred to, one determines this result by first finding the yield of the security based upon its maturing at par, and by the use of the ordinary tables of bond values.
The next step is to find out the present worth of the amount of premium payable to the holder at maturity, with interest compounded either at the rate of income yield, just determined, or, better still, at some fair average rate of interest, say 5%. Let us illustrate as follows:
A bond running 20 years, paying 6% interest, if sold at 112.55, pays 5%. At the maturity of the bond - 20 years hence - the holder will collect $105 for each $100 par value of the bond. The present worth of $5.00 payable 20 years from date, compounded semi-annually at 5% per annum, would be $1.86. Thus we may add this amount to the price of 112.55, given above, which would give us 114.41, and, consequently, if the bond were purchased at the latter figure, the yield would still be 5% per annum, providing the original purchaser held the bond until maturity and collected the premium. Or, upon the same basis of reasoning, the 1.86 may be deducted from the bond table price of 112.55, giving 110.69. Applying this price to the table, we find that the yield would be nearly 5.15%. For all practical purposes, therefore, a bond, as in the above example, pays the purchaser, not 5% according to the table of bond values, but about 5.15% which would be the yield at a price of $110.54.