Trust Receipts

These are receipts issued by a trust company in return for securities placed with them as custodians. These receipts, like bonds, are issued in a negotiable form so that dealings in them can be carried on readily. There are voting trust receipts, a security protected by another security for which a voting trust has been formed, consisting of a number of directors. The scheme of the voting trust is to maintain the control of a corporation in certain hands for a prescribed length of time in order to insure one continued management of its affairs. The idea when properly applied may turn to a corporation's advantage, but sometimes it is used to perpetuate, for a number of years, control in certain hands without the necessity of making heavy investments, which would be required were not all the stock in a voting trust.

Interim Certificates

Interim certificates are merely promises to deliver bonds or other securities when they are ready for distribution and which may not be engraved and all signed by the proper officers when they are first offered to the public. In their place, certificates, called interim certificates, issued to bearer, are given to be exchanged when the other securities are ready for delivery.

Certificates Of Deposit

Last, but not least in importance, is the certificate of deposit, which, as its name indicates, identifies the holder as having deposited at a certain place the securities described in the certificate. These certificates of deposits are the outgrowth of the reorganizations of embarrassed corporations. When this unfortunate situation is reached, the more important holders of the securities form a committee for the mutual protection of all the holders of the same class of securities. An agreement is drawn up by attorneys, vesting this committee with certain powers to effect a reorganization, and a call is issued to the security holders to deposit their security with a designated trust company. In signing this agreement and upon deposit of his security, the holder appoints the committee his agent or attorney to do all the things stipulated in the agreement and agrees to share ratably all the expenses incurred by the committee. The trust company which acts as a depository issues a certificate of deposit, usually to bearer, identifying the holder as the true owner of the securities which have been deposited with it. Then, when a reorganization has been brought about, whatever new securities are authorized in the place of the old ones, are exchanged for these certificates of deposit after all expenses of the committee have been paid.

Certificates of deposit may apply to stocks as well as to bonds. They are merely mentioned here as a security which, applying to bonds, may as well be described now as later. As their very character shows an interest in a bankrupt corporation, there is hardly any necessity to discuss their investment value. That depends entirely upon the security itself which is pledged. If a first mortgage bond, then there may be behind it- more than enough property to protect the creditor in full, including the accrued interest. Sometimes this does not appear to be the case, as with the first mortgage bonds of the insolvent Wabash-Pittsburg Terminal Railroad. The holders of these bonds were compelled to fight to avoid having to take an inferior security in return for the one they held. The certificate of deposit, in our scheme of bringing to life once more our prostrate corporations, is credited chiefly to the ingenuity of J. P. Morgan, the greatest of reorganizes.

Commercial Paper

With a brief mention of commercial paper we shall have disposed of this security. Essentially forming an investment more for banks than individuals, it will hardly interest the student of finance unless he is shaping his education towards a banking career. The degrees of safety in commercial paper vary with the standing of the maker. Prime commercial paper is the note with nothing but the maker's name. With each endorsement are indicated the exactions placed upon the borrowers by the banks before they will make the loan. Yet this is not always true. The paper of some large corporations, to make it readily salable through note brokers, will carry a number of endorsements.

Miscellaneous Bonds And Securities. Test Questions

1. Explain the nature of an income bond.

2. What is a collateral bond? How does it differ from an income bond?

3. What is the relative value of a collateral bond for investment purposes?

4. Describe a debenture bond. When and how are such bonds issued?

5. What is a convertible bond? Describe its merits as an investment proposition.

6. How are short-term notes used in financing enterprises?

7. What are trust receipts?

8. Explain the nature and use of interim certificates.

9. How and when do certificates of deposit arise?

10. Why is commercial paper a form of investment for banks rather than for individuals?

11. Under what conditions are short-term notes a desirable investment? When not?

12. What are the tests of a good investment in bonds?