Bonds are issued in certain denominations against the mortgage. The denominations are usually $500, $1,000 or $5,000. However, there is nothing to prevent their being $10,000 or $20,000, or on the other hand as small a figure as $100, as this is a matter largely left to the discretion of those bankers who arrange the bond issue. Custom however, with us, has largely favored $500 or $1,000 bonds. To distribute bonds more widely among smaller investors, bonds of $100 denomination have lately been increasing in popularity.

Each bond represents a direct interest in the mortgage for exactly the denomination it calls for; that is to say, the borrower has pledged certain collateral to guarantee the payment of the bond upon the expiration of a given period of time, together with a fixed per cent of interest each year, payable on demand, either annually, semiannually, or quarterly.

The difficulty of borrowing considerable money from one or a few individuals in large transactions can be readily appreciated. Thus, to facilitate borrowing by large enterprises, modern finance has evolved the scheme of splitting up the loan in so many integral parts, each part constituting a bond. The Pennsylvania Railroad, for example, has outstanding against its main line, a first mortgage of $100,000,000. Now it is not possible to raise such a large sum from one individual; therefore, it is obtained through many, by the means of bonds, as has already been described.

The first mortgage bond, quite naturally, is the prime investment, yet from a point of security this does not always indicate that second, third, or even more mortgage bonds are not also safe investments, for the property underlying the first mortgage bonds may have multiplied in value so fast as to have accumulated an equity sufficiently large to allow the creation of second and subsequent mortgage bonds with perfect safety.

The Erie Railroad is an illustration. This immense railroad system has issued as many as five first mortgage bonds against the same property, namely: The first, 4 per cent bonds, which matured in 1907; the second, 5 per cent bonds due in 1919; the third, 4½ per cent bonds due in 1923; the fourth, 5 per cent bonds due in 1929; and the fifth, 4 per cent bonds due in 1928. In citing the Erie Railroad as an illustration, I do not want it understood that I use it as expressing my opinion that these several first mortgage bonds are examples of the safest type of investments. Other railroads have not been as explicit in properly cataloging their bond issues as has the Erie, and this has resulted in much confusion to the average investor, who, as he reads of a first mortgage bond, is most likely to assume without further inquiry that it is literally as described, a first mortgage without any incumbrance ahead of it. Such is not always the case. Upon reading the description of the bond more closely, the investor is likely to run across something like the following, which is the exact phrasing taken from a well-known first mortgage railroad bond:

The authorized issue of the first mortgage 5 per cent bonds is $3,000,000, the unissued $120,000 being reserved for the retirement of the.......... bridge bonds.

Analyze this paragraph carefully and its meaning will become clear. These bonds, although called first mortgage bonds, are not exactly that. There is a security ahead of them in these bridge bonds which must first be satisfied. Without the bridge, the railroad would be cut in two parts like a dismembered body.

Here again is another description of a first mortgage bond which will cast further light on this important point. It concerns a first mortgage 6 per cent railroad bond:

Amount authorized is $6,000,000; issued, $2,788,000, of which $1,288,000 was in exchange for prior lien bonds.

To be exact, what this means is that there are, ahead of the first mortgage 6 per cent bonds, other bonds already in existence and issued against a mortgage of $1,288,000, and out of the new $6,000,000 first mortgage bonds, enough bonds have been reserved in the treasury to replace the already existing bonds when they fall due.

The so-called general mortgage bond may not have other bonds ahead of it, but more often it will be found that such is the case. The purpose behind such a bond issue is to have some day, when all prior lien and branch line bonds have matured, but one kind of bond outstanding. These bonds are also issued in large amounts to provide a railroad's treasury with a reserve fund in securities on which to depend for additions and extensions as future development may demand.