This section is from the "Everybody's Guide to Money Matters" book, by William Cotton. With a description of the various investments chiefly dealt in on the stock exchange, and the mode of dealing therein. Some account of the pitfalls prepared for the unwary, and suggestions to the cautious investor.
These represent money borrowed by various foreign countries on the security of their credit or solvency, and the loans stand to them in the same relationship as the British Government Funds do to this country. The debts are chiefly represented by bonds, the same as Colonial Government Bonds, and with coupons attached, which, whether payable in England or their own country, are collected by bankers in the same manner. Such European States as Germany, France, Russia, Denmark, Sweden, and Italy, always enjoy good credit, and they may be considered responsible for their financial engagements. In the case of Italy, however, it must be remembered that the Italian income-tax, amounting to 20 per cent., is deducted from the interest, which has also to bear the English income-tax, whatever at the time it may be.
When investing in Colonial or Foreign bonds, especial care is necessary in observing the conditions of re-payment. Sometimes it is at the option of the borrower, but usually at a certain specified date. Neglect of this precaution may lead to an investor purchasing at a premium, and sooner than expected being paid off at par.
Some of these loans, too, are paid off by annual instalments, lots being drawn to determine the bonds to be redeemed. If the bonds, therefore, have been bought at a premium, there is always the risk of their being drawn for payment and paid off at par. On the other hand, if the bonds are bought at a discount, there is no danger of loss; and a profit will be realised should they be drawn for payment.
For instance, a £100 bond is purchased at 4 premium, costing £104. If the bond is paid off at par, or £100, there is obviously a loss of £4; but if the bond is purchased at 4 discount, costing £96, it is equally obvious that, if paid off at par, there would be a gain of £4.