Account And Risk

The forms usually provided by brokers for the use of their customers when giving orders for purchases or sales of securities, bears the inscription, "Buy or sell for my account and risk." The meaning of this is that when an order as given is executed by the broker, it is done for the account and risk of the customer exclusively, and that the broker is simply acting as the agent in the matter and is therefore in no sense liable himself, but holds the customer wholly responsible for the transaction.

Accrued Dividend

The amount or proportion of a regular dividend not yet payable that has accumulated at a given time after the date of payment of the preceding regular dividend. For instance, if a dividend on a stock at the rate of 6% per annum is payable semi-annually January and July 1st, the amount of accrued dividend on a given date, such as April 1st, will be 1 1/2%. Cumulative dividends which have not been paid when due, but which have accumulated, are sometimes called accrued dividends, but the correct term for such is "accumulated dividends." A cumulative dividend is an entirely different matter.

Accrued Interest

This is the amount of interest on a bond or debenture) stock not yet payable, but which has accrued over a given period of time subsequent to the last regular payment. For instance, if the interest on a 4% bond is payable semi-annually January and July 1, the amount of accrued interest on the bond on April 1st would be exactly 1%, which on a $1,000 bond would amount to $10. Many bonds are quoted "with accrued interest" and sold on this basis. This is particularly true of unlisted issues, municipal bonds, etc. Most of the issues quoted on the stock exchanges are sold "flat"; that is, the accrued interest is not separately figured but is included in the price. To bring the distinction out concretely between a price quoted with accrued interest, and a price quoted "flat" the following illustration is submitted: If a 4% bond is selling at 90 and accrued interest on January 1st, the total cost of the bond will be exactly $900; but if on April 1st it is still quoted at 90 and accrued interest, the total cost of the bond will be not $900 but $910, the $10 representing the accrued interest over the preceding three months. If, however, the bond is quoted "flat" the price on April 1st, other things being equal, would be given as 91. It will be seen, therefore, that the matter of accrued interest directly affects the "flat" price but does not affect the "and interest" price. As very large transactions are made daily in bonds on an accrued interest basis, it is necessary to do a great deal of figuring from day to day on the amounts of accrued interest when making purchases and sales. To facilitate this, most bankers and brokers make use of pocket bond interest tables, which contain the figures showing the amounts of accrued interest on $1,000 bonds for every day from one day to six months, at the various rates of interest from 2% up to 8%. The most popular of these pocket tables in the United States is published by The Moody Corporation.

Accumulated Dividends

This term is properly used to describe cumulative dividends which for one reason or another have not been paid as they fell due. For instance, in many corporations, particularly industrials, there are issues of preferred stocks on which the dividend charge is so heavy that the corporation is not able to earn and meet the payments. The amounts of dividends, therefore, have accumulated, and, theoretically at least, must be paid off some day. Usually when dividends of this kind or portions of dividends have accumulated over a series of years and it has been pretty well demonstrated that there is little prospect of the corporation being able ever to make good the back payments, some plan of compromise is then submitted to the stockholders whereby the accumulations are paid, possibly in securities of some kind, and then the rate of dividends is scaled down for the future. It is not always difficult for the corporation to make a readjustment of this kind, as the cumulative clause in a stock is really not of a great deal of value if the corporation cannot in some way earn sufficient money to pay the full dividend. In other words, the stockholder has no means of foreclosing on the property or bringing legal action if the past dividends are not paid.

Adjustment Bond

This term is used to describe a bond which has been issued for the purpose of in some way adjusting the finances of a company, usually at the time of a reorganization. For example, when the Atchison, Topeka & Santa Fe system was reorganized in 1897, some compromise had to be made with the old preferred stockholders and the holders of the general mortgage bonds. It was necessary for the road to radically reduce its fixed charges, but at the same time the reorganization committee could not avoid giving the holders of a large proportion of the old securities something more tangible than a mere preferred stock. The holders were therefore given a second mortgage bond, which would be entitled to receive interest only in case the same had been earned, and in no case would the holders of the bond be able to foreclose before maturity in the event of the interest not being paid. The interest on this particular issue was to become accumulative after 5 years, but as far as any positive guarantee of interest being currently paid was concerned, the issue was simply in the same class as the ordinary accumulative preferred stock. It will thus be seen that this issue of bonds was in the nature of a compromise for the benefit of the holders of old securities, and it was therefore given the title of "adjustment bond." Several other large issues of adjustment bonds have since been created by other companies, but the Atchison "adjustments" are the most conspicuous example of this kind of security.