General mortgage bonds are those secured by a mortgage on a corporation's property whose various component parts or some of them have previously been mortgaged to secure other bonds taking prior rank. Refunding bonds are those which are authorized as an issue to take up and pay off other bonds which are outstanding. They are commonly, though not always, secured by a general mortgage.

Equipment bonds are those issued specifically, in the case of steam railroads, to pay for cars, locomotives, etc., in the case of street railways, to pay for cars, motors, etc., and in the case of industrial corporations to pay for machinery. Such bonds are chattel mortgages, being direct liens on the equipment paid for out of the proceeds of their sale. They are almost invariably in serial form and incidentally, they have a unique investment record, particularly the railroad equipment issues which have been paid, principal and interest through all degrees of financial adversity in order that the issuing companies might retain possession of the equipment without which they could not operate.

Terminal bonds are as the name implies those secured by mortgage on the terminal properties of steam railroads or interurban traction companies, usually located at important centers. Such bonds almost always have large inherent value, purely as real-estate investments, irrespective of the financial strength of the issuing companies, although the latter is, of course, an important consideration. Frequently, as in the case of union stations, the ownership of the real estate and its improvements is vested in separate companies and the bonds are guaranteed jointly and severally by all the roads using the terminals.

Collateral trust bonds are those secured by the deposit of other securities, either bonds or stocks or both. Not infrequently they are indirect liens on valuable property, but as a rule the credit of the issuing corporation is a very large element in their desirability as investments.

Again, adjustment bonds, as implied in the name, are those which are issued in connection with the adjustment of a corporation's debt, usually at the end of a receivership. This name is commonly used as a sort of disguise for income bonds on which the issuing corporation does not obligate itself to pay interest unless its directors deem earnings sufficiently large to do so prudently.

Convertible bonds are as a rule unsecured promises to pay, giving their holders the privilege, exercisable at their option, of converting the bonds at a certain fixed ratio and within a specified time into some other form of security, usually the capital stock of the issuing corporation. On account of the fact that such bonds are ordinarily bound by their very nature to share in the fortunes of some stock, they can seldom be recommended as strictly conservative investments.

Corporation debentures rank as junior bonds, and in many cases are practically the equivalent of a preferred stock without voting power. Their safety depends largely upon the credit and integrity of the corporations which issue them, because they are not secured by mortgage on specified property of any kind.

Another class of corporation securities in connection with which, as in the case of bonds, there is a moral and legal obligation to pay interest, comprises short-term notes. This class presents a wide diversity of investment quality. Notes are sometimes secured by direct mortgages on property, and in that form they may possess the fundamental characteristics of good bonds. More frequently, however, they are issued either as unsecured obligations or against the deposit of miscellaneous collateral which means property deposited to secure the debt. As a rule they bear higher rates of interest due to the fact that they are an emergency financial measure, owing their existence to conditions, either in the general investment market, or in the affairs of the issuing companies which render impossible the sale of securities of the more permanent forms on favorable terms. It is ordinarily difficult for any but highly experienced investors to pick the good investments from the bad and the indifferent in this group of cocurities.

I have departed from the usual order of discussion of the subject of bond investment with the idea of emphasizing the complexities involved in the selection of desirable corporation bonds. Government, state and municipal bonds, taken as a group, are by common consent entitled to first consideration from the point of view of intrinsic safety. Nor do they present the great diversity of form that is presented by the group of corporation bonds. They are all simply promises to pay based on the faith and credit of the governments, states or municipalities which issue them. Like the bonds of railroads, public service corporations and industrials, they are evidences of debt given in exchange for money borrowed for specific purposes, and their payment, principal and interest, is provided for out of taxes, either general or special.

Scarcely without exception, the bonds of the United States government are not suitable for private investment, simply because they are issued under conditions which make them yield too small an income. From the point of view of yield, state bonds are in about the same class as government bonds and for the most part are bought by institutions like the banks and insurance companies, or for special purposes by individuals having large sums of money to employ.

For all practical purposes, municipal bonds - those issued by cities, towns, counties, school districts, etc. - are, as a class, as safe as government or state bonds. Indeed, some authorities rank them ahead of state obligations - that is, if they are of the type known as "direct" municipals, as distinguished from the type known as "special assessment" or "improvement" bonds, which with some exceptions depend for the safety of their principal and interest upon the tax-paying ability of property owners in the particular districts for whose improvement they are issued, rather than upon the general taxing power of entire municipalities. The advantages of municipal bonds, moreover, are their extraordinary safety and good average yield. The large issues of cities like New York, Boston, Philadelphia and Chicago, being so well known and enjoying such ready markets, yield little, if any, more than four per cent. But the smaller issues of less important cities and towns, as well as those of counties, school districts, etc., often yield fully five per cent* Another advantage possessed by this group of bonds which is frequently of importance for the individual investor to consider is that they are as a whole exempted from the federal income tax, and as a rule from the personal property tax at least in the state of origin. In coming to the consideration of corporation shares or stocks, as investments, I want to repeat a statement made in setting forth the nature of a bond; namely, that no matter how sound stock may be, it represents the risk-taking, profit-taking part of an enterprise - that it is the buffer between the creditor and loss. Of course, if no one bought stock - if there were no risk-takers, no speculators - there could be and would be no bonds. Bonds, in fact, are safe only when there is a fairly large stock issue, representing actual cash invested either by subscribers or saved from surplus earnings. But it may as well be understood at the outset that inexperienced investors should leave stocks to persons of more experience who can afford to accept less security for the sake of a greater possible income.