Coupon And Registered Bonds

Attached to the bonds are small coupons. If the interest on a twenty-year bond is made payable semiannually on tie first days of January and July and is at the rate of 5 per cent per annum, there are appended to each $1,000 bond 40 separate coupons, each stipulating that there will be paid on a given date, at a certain place agreed upon, the sum of $25, usually in gold. In a similar manner will the principal of the bond be paid when the date of maturity is reached. All that is required of the holder of the bond is to clip off these coupons as they fall due and deposit them with his bank for collection, or he can present them in person, or request that payment be made by sending in the coupons.

To make it as convenient as possible for bondholders, these bonds may be registered with the corporations issuing them; that is, the bonds can be left in their custody, with the name and address of the person to whom checks for the interest and principal should be mailed. Most bonds are made out to the bearer. This is done to make possible their speedy sale and transfer. Therefore, in case they are lost or stolen and fall into a third person's possession, the loss will fall upon the original owner. To safeguard against such an event, timid investors and trustees of estates quite often register their bonds, even though they are aware that their securities, lacking the advantages of a quick transfer, may realize, if sold, a fraction less on account of the delay in delivery, as the bonds must first be released on the corporation's books. As the interest on the bonds falls due, it is deposited with the bank where it is paid, and disbursed as the coupons are presented.

Redemption Of Bonds

No bonds can be called for payment unless there is a stipulation to that effect. Our early railroad builders never expected to witness such a rapid expansion in value in their properties as occurred in their lifetime. Had they foreseen it, they would have made some provision to cancel their first mortgage bonds earlier than the full term of the loan, so as to leave their path clear of obstructions to raise additional money as the growth of their railroads required it.

Only a few years ago some of the Chicago & North Western first mortgage 7 per cent bonds matured. This premier railroad system created these bonds when the West was still young, at a time when it was not as easy to borrow money as now, and the builders of the system, not to burden it for a long term of years with repayment of the money for its construction, imagined they were driving a shrewd financial bargain when they made these bonds payable in forty and fifty years. But they seriously erred. Long before these bonds reached their date of maturity, the Chicago & North Western was able to borrow whatever money was required to finance all improvements and extensions with bonds bearing even as-low an interest rate as 3½ per cent. Moreover (and this would have been a still greater surprise to the founders of this property) these low interest-bearing bonds brought par, whereas in their day, to make their 7 per cent bonds attractive, they were forced to offer them at a considerable discount.

This hard lesson of our earlier financing of our railroads has never since been neglected. Now, when a railroad or any corporation pledges any of its property as security for a bond issue and anticipates that in the course of time the property will enhance greatly in value or the opportunity may arise to borrow money more cheaply, it includes in the mortgage the privilege of calling in the bonds for payment, on any given interest date, usually at a premium of from 5 to 10 per cent. We often see in a bond the words "callable on any interest day on -----------weeks' previous notice at-----------with accrued interest," meaning the interest due for the period between the last date when interest has been paid and the date when payment in full for the bonds is to be made.

A reduction of ½ per cent in interest on a large amount of money represents a tidy annual sum saved. Shrewd financiers fully realize this. Because of their increased credit and the increased value of their property, a good many of our railroads could, in the course of years, have effected the saving of many millions of dollars by a cheaper rate of interest, had they been in the position to call their early bonds issued at a high rate of interest. As it was, they had to allow them to run out their term of issue.

Conclusion

What a multiplicity of all sorts and types of bonds now exists may be judged from the following partial list. There are government bonds, state, and municipal, the last-named being divided into direct obligations of the city, tax, drainage, pavement, road, highway, improvement, lighting, gas, water, assessment, boulevard, etc.; there are the first mortgage railroad and corporation bonds already described, and mortgage bonds following in sequence in regard to security; there are consolidated, extension, income, refunding, general, construction, terminal, improvement, divisional, equipment, convertible, collateral, lien, series, guaranteed, coal, timber, bridge, tunnel, vessel, debenture, participating, purchased-line, unified, branch-line, joint, stamped, adjustable, land-grant, canal, loan, underlying, redeemable, reorganization, tax-exempt, purchase-money, sinking-fund, convertible-debenture, and real estate bonds, and many other kinds. Besides these there are trust-receipt certificates and short-term notes.

When the investor arrays all these bonds before his mental vision, he will understand the full meaning of the multiplicity and complexity of bonds, which has resulted from the swift evolution of our modern finance. He will realize that a trained mind is necessary to judge the. intrinsic value behind all these different names given to bonds in this modern day, and he will also realize how a clever financier, under the guise of a bond, can dispose of a security which is no more a bond in the true sense of the term than is the paper on which this is printed.

The Multiplicity And Complexity Of Bonds. Test Questions

1. What are the five different bases which may be used in judging the value of a bond?

2. What are some of the distinguishing characteristics of bonds as judged from these different bases?

3. What are the four primary divisions into which investment bonds are generally grouped?

4. What is meant by the term "equity" as used in investment?

5. How does a bondholder differ from a stockholder?

6. What is the meaning of coupon and of registered bonds?

7. What is meant by callable bonds? What are their advantages from the standpoint of financing? How do they rank as investment securities?

8. How does the multiplicity of bonds make more necessary an intelligent understanding of bonds before their purchase ?