It is possible to form a clear conception of the many different types of securities marked as bonds on the shelves of investment dealers only when they are grouped one after the other in their order of importance and marshalled before the mental vision. We may then gain a fair idea, not alone of their variety, but of their multiplicity, and from that realize how their complex character may confuse investors unless they are thoroughly informed on this kind of investments.

Bonds may be classified in many different ways. The classifications used by financial writers differ in detail even though they are built upon practically the same foundations. The variety of bonds is so great that it is impossible to make a classification that admits of no variation. The important point is to understand the basis of classification used in a discussion.

There are essentially five different bases that may be used in judging the value of a bond.

1. The security for payment.

2. The purpose of the bond issue.

3. The manner of payment.

4. Conditions of redemption.

5. The nature of the issuing company.

A classification based upon the security of the bonds involves a discussion of such terms as mortgage, terminal, collateral trust, debenture, and income bonds.

As to security, bonds are essentially of two kinds: Those with specially pledged securities, such as mortgage and collateral trust bonds, and those with no special security, such as debenture and income bonds. Various special classes, such as terminal and divisional bonds, are really mortgage bonds with a limited portion of the company's property pledged for redemption.

A classification of bonds based upon the purposes of the bond issue involves the use of such qualifying terms as unifying, refunding, construction, and extension.

A classification based upon the manner of payment uses the simple division into coupon and registered bonds. Registration may apply to principal or interest, or both.

When the manner of redemption of bonds is considered, we get such classes as gold, redeemable, irredeemable, serial, and convertible bonds.

When the nature of the issuing company is used as a basis for classification, we get the familiar market quotation classification of railroad bonds, public utility bonds, industrial bonds, and governmental bonds.

In connection with each class of bonds, the reader should bear in mind that they may fall under several or all of these classifications, depending upon the point of view. Thus a first mortgage bond of a railroad company may be for construction purposes, registered as to principal and interest, and redeemable at a fixed period in gold.

The following classification of bonds emphasizes these features, giving in the first columns a general classification, in the second column the enterprises against which issued, and in the third column the nature of the bonds themselves:

This confusion in the varieties of bonds should not center the investor's interest in the methods of issuance or in their manner of payment. The collateral that secures them is what counts. Here is where the investor must exercise precaution. Often his power of judgment must be developed to a very high degree. Essentially one factor must be determined by bondholders for their protection, and that is the equity existing behind the loan. In the process of making the simplest loan, no one would think of accepting as security any pledge which will not, if sold, realize at once the face of the loan, together with all accumulated interest and all the expense caused by the legal enforcement of its payment. It is necessary, as a precautionary measure against possible loss in the event of a default on the part of the borrower, whether for interest or the payment of the principal, to exact a certain marketable value in excess of the loan. This is referred to in financial circles as the equity.

Investors should measure bonds by the same yardstick. The smaller the equity the more speculative is a bond, and in turn the better income should it yield to balance the larger risk the holder must assume. Bondholders are creditors of a corporation. They are unlike stockholders, who divide what profits are made. They lend their capital in return for a fixed interest, and ought, by the very nature of their position as creditors, to be amply secured against any and all stressful business weather a corporation may meet. For that very reason the collateral pledged behind bonds ought at all times to be subjected to the most exacting investigation.