Terminal Bonds

The terminal bond is usually secured by the main station property owned by a road. This property, consisting of valuable real estate, is at least nowadays kept distinct from all other assets and used as a collateral to secure separate loans. This idea is further applied to other property owned by a railroad, not directly associated with its main business, as in the case of the road's harbor or water business. A number of our roads, for the development of this traffic, have raised money for the purchase of ferry boats, lighters, vessels, and tug boats, all of which it pledges for separate loans, and each bond is specified under a separate name. So also with bridge bonds, directly secured by certain bridges a road has built. Tunnel bonds also are issued in the same way.

Miscellaneous Bonds

A joint bond is usually a bond associated with some other bond in a particular lien. An underlying bond is named thus to distinguish it from another bond on the same property. A redeemable bond implies that the issuing company reserves the privilege of calling upon the holder for the return of the bond, with accrued interest, at a specified price.

There are also issued by the railroads, canal bonds, timber bonds, coal bonds, land grant bonds, and so forth, each being against particular property, and in many instances they are valuable. Take, for instance, the Reading, the Lackawanna, the Delaware & Hudson, the Jersey Central, and the Lehigh Valley; their coal properties are among the most valuable of their entire assets, as are also the land grants of the Southern Pacific, the Union Pacific, and the Canadian Pacific. The land, originally granted these roads by their respective governments to encourage their development, has increased enormously in value through the transportation facilities which have been accorded them, and through the influx of population.

There is also what is styled a reorganization bond, an obligation issued at the time when a financially embarrassed railroad was reorganized and again put on its feet. There is the stamped bond, stamped for some reason or other. This is a rare bond, the Atchison being one of the very few railroads having a bond of this description. Then there is the registered bond, taking its name from the privilege accorded the holder to register his name and address and the amount of his bonds on the books of a railroad as a protection against loss or theft of his bonds. When this is done the bonds can pass from one holder to another only by a transfer on the books, for bonds to be quickly negotiable are made out simply to bearer.

Sinking fund bonds derive their name from a provision that the issuing company agrees to redeem each year a specified number until they are all automatically retired. Sometimes a railroad carries the redeemed bonds in its own treasury, using the coupons to help pay the interest on the outstanding bonds, or it may agree in the mortgage to set aside each year a certain per cent of the earnings as a sinking fund to retire the bonds automatically when due, the interest on this money helping to defray the interest on the bonds.

There are also guaranteed railroad bonds, issued against controlled, leased, or absorbed lines, and guaranteed by the controlling lines. Sometimes these bonds are guaranteed both as to interest and principal, meaning that if there is a default the guarantor will reimburse the holders in full. Some of these bonds are guaranteed only as to interest, as in the case of the bonds of the Western Pacific, the interest on the first mortgage 5 per cent bonds being guaranteed by the Denver & Rio Grande, but not the principal.

Equipment Bonds

A class of railroad bond which in late years has jumped into great popularity is the equipment bond. Nearly every railroad has one or more such issues, some of the larger roads having many. These bonds are secured by the rolling stock, consisting of locomotives, passenger coaches, and freight cars. It can easily be inferred what constitutes their safety in the opinion of investors when it is taken into account that without equipment a railroad is useless and its tracks would soon consist of two streaks of rust.

Railroads have gone into receivers' hands, suspending payment of interest on a portion, if not all, of their bonds until they could be refinanced, but rarely have even receivers avoided paying promptly the interest on equipment bonds, realizing the absolute necessity of retaining the equipment. Being easily movable, this equipment gives the bondholders a conveniently salable collateral if they should have to take it over to satisfy their loan, and then it would not be possible to operate the road unless other equipment was purchased.

Railroad Bonds. Test Questions

1. Why are railroads, as a rule, heavy borrowers?

2. Show how the unexpected development of certain railroads accounts in part for the multiplicity of railroad bond issues.

3. Explain how mortgage bonds are issued on railroad property.

4. Is a mortgage bond always a first lien upon property? Explain.

5. What is the meaning of a consolidated bond?

6. How does a refunding bond differ from a consolidated bond?

7. Describe extension and divisional bonds.

8. When are unifying and adjustment bonds used?

9. What are serial bonds? Why are they issued?

10. How do guaranteed railroad bonds arise? Describe the provisions of at least one such series of bonds.

11. What are equipment bonds? Why are they often attractive for investment?

12. Enumerate the different kinds of railroad bonds.

13. What are the chief precautions to be observed in reading the provisions of a railroad bond? Illustrate.

14. What factors determine the rate of interest of a railroad bond?