There still remain other means by aid of which corporations manage to borrow money, but they do not involve the necessity of pledging any tangible assets, as is the case with the different bonds described in the previous section.

It is not by their names that these bonds may be known, for they, too, are known as bonds. It is by their character that they should be distinguished, by which I mean that the investor ought to look carefully into them, for, since they masquerade under the general name of a bond, there is always the possibility of acquiring a security without any intrinsic value behind it, which fact is not discovered until something goes wrong.

Income Bonds

Prominent among such securities is the income bond. To the uninitiated investor, the word "income" has a confidence-inspiring ring to it, but in reality the so-called income bond only pledges the corporation to pay the promised interest when it is earned, and not otherwise. A case in point where such a bond proved no better investment than a non-producing stock, was that of the income mortgage bonds of the Central Railroad of Georgia, of which there are three - the first, second, and third preferred mortgage income bonds. On the second and third income bonds, the interest was not paid for some years, and finally, in exasperation, the holders of the second income bonds brought suit to force the company to pay them their interest first before diverting the net profits to improvements. While they won their case, their predicament during the years when no returns were received conveys its own lesson of the insecurity that lurks behind an investment in income bonds. Some stocks are preferable to income bonds. Such bonds should be thoroughly investigated before being accepted as a desirable investment; especially should the profits the company is earning and has earned over a period of years be looked into, for it is from this source the payments of the interest on the bonds are derived.

Collateral Bonds

There is also the collateral bond, not differing very much from the income bond, except technically. Bonds of this character have as their security stocks or bonds in other corporations. There are many of this class of bonds in existence. They are the outgrowth of the tendency in recent years of the strong corporation to absorb the business of rival corporations, and they are also the direct outgrowth of the holding-company plan. The holding company is a form of corporation which is not itself directly engaged in business, but which holds the controlling stocks and bonds of actual operating corporations; against the ownership of these securities they issue their own stocks and bonds. It is these holding companies that have acquired the name of trusts.

In nearly every important industry may be found the holding corporation. To mention a few, there are the American Tobacco Company, the International Harvester Company, the Interborough-Metropolitan, the Bock Island Company, the American Chicle Company, and the International Mercantile Marine, all corporations owning the majority of the securities of other corporations. These are only a few of them.

Some of these holding corporations have issued bonds, pledging for their security either the stocks or bonds of the subsidiary corporations. They are the collateral bonds. Other corporations which do not exactly come within the definition of a holding company also issue such bonds. For this interest they depend upon the earnings or income received from other underlying securities.

An applicable illustration of what collateral bonds are is found in the Interborough-Metropolitan 4½ per cent collateral bonds. For each unit of two hundred dollars, there is pledged one share of stock, with a par value of $100 of the Interborough Rapid Transit Company, which operates the Subway in New York City. This underlying company's dividend each year is used to pay the 4½ per cent interest on the collateral bonds.

These bonds differ from income bonds only in that their interest must be paid. This is an implied obligation. The interest is paid as long as the collateral securities back of the bonds earn a sufficient income. When this income falls off and a default takes place, the holders of such bonds may take over the collateral by due process of law. They then find themselves in the position of falling heir to other securities, either as stockholders or as bondholders in the underlying corporations. The fact that the securities were unable to earn enough to pay their interest, in most instances, does not improve the situation much. From a standpoint of safety, the majority of collateral bonds, on a final analysis, cannot be ranked as suitable investments for anyone dependent upon income and security.

It may well be said for some of these bonds that they are entitled only to the designation of bonds to distinguish them from stocks, in that they place their holders in the category of creditors of a corporation, whereas a stockholder can only participate in the profits when there are any to disburse. The one must be paid to maintain the corporation's solvency; the other must take its chances.