Bond (finance)

“ A very large quantity of 41⁄2, 5 and 6 per cent. bonds are held by banks, by insurance companies, trust companies, savings institutions and in trust for widows and orphans. Thus they form an important part of the securities upon which these institutions are based. They are among their most reliable and most available assets. Probably most of us do not own a United States bond in the world. ”

“ These bonds are secured by a mortgage or deed of trust on all the property of the corporation they represent.
To redeem these bonds, when due, the company annually sets apart a sum, known as a "Sinking fund," for their redemption.
Such bonds are far safer than any form of the company's stock, for they bear interest that must be met, whether or not dividends are declared.
As with a real estate mortgage, the property pledged in the bond should be defined.
RAILROAD BONDS Every railroad in the country has been built and equipped by the sale of its bonds. ”

“ The bondholder is interested in the absolute regularity of his interest, and in the security that lies behind the principal, and it is to-day the custom of banking houses to consider a bond well secured when, in a territory of reasonably rapid growth, the principal is earning say twice the interest on its bonds, and when the cost of reproduction is in excess of the amount of the bonds, provided that the property is in good physical condition. ”

“ The fact that their face value is expressed in money sets very definite limits to their prices.*12 If, because of a doubling in the quantity of money, the value and profits of a railroad measured in money were doubled, the bondholder could not, on that account, realize more money for his bond. The value of the bond is not greatly affected by the valuation and profits of the railroad, so long as these are sufficient to guarantee the bond. The bond is an agreement to pay stated sums at stated times. It represents a limited money value carved out of the road. ”

“ The manner of raising capital is largely a matter of credit, expediency, and the question of fixed operating expenses. It rarely happens that bonds carry with them the privilege of voice in the management of the corporation’s affairs; that is usually limited strictly to the shareholders. Accordingly, the issue of bonds instead of additional stock does not interfere with the management or control of the concern—so long as the contract requirements of the bond issue are adhered to. ”

“ The long-term bond protects the holder against the probable steady fall in the rate of interest on capital. It promises him advantage in the future in return for surrender in the present.
The reduction in charges by the substitution, for mortgage bonds with fixed interest, of securities upon which payment of interest is optional, has been as important as the reduction in the rates of interest just described. Such securities may be either income bonds or stock. ”

“ All national banks are double liability companies. If A owns $5000 stock in a [54] national bank, and the bank fails, he loses his stock; and if the liabilities of the bank are large he may be obliged to pay a part or the whole of an additional $5000.
XVI. BONDS
When a railroad company, or a city or any other corporation desires to borrow money it is a common practice to issue instruments of credit called bonds. A bond means something that binds. Bonds bear the same relation to the resources of a corporation that mortgages do to real estate. ”

“ The persons who want to establish national banks must therefore buy their bonds. They must buy them where bonds are sold, that is in the Eastern markets; and they must buy their bonds with money. Where do they get that money? They take that money out of their home circulation, and the money so taken out of their home circulation they carry to New York. Now see how this operates. For a $1000 bond they have to buy they pay, as 5 per cent. bonds now stand, about $1120 in currency. That sum of $1120 is withdrawn from their home circulation and is added to that of New York. ”

“ A bank in a rural region which loads up heavily with the safest local bonds is little better off than with farm mortgages. For neither is there a quick market in an emergency. A city bank, near the stock exchange, may very safely buy in large amounts highly saleable as a profitable substitute for part of its cash reserve. Even country banks may, and do, safely own such bonds. Short loans on stock and bond security, constitute the most important single type of bank-loan in the United States, as we shall later see. ”

“ A bondholder's sufficient financial interest may be even more attenuated, since any recovery by the issuer will increase the value of the bond only because the issuer may become a slightly better credit risk. ”

“ The bondholder, proud in all the security of the untaxed receiver of other people’s taxes, would see in these fields merely the industry from which he gathers tribute; it would never dawn on his mind that without the opening of those furrows and the hurrying army of children dropping corn his bond wouldn’t be worth the paper it is written on.
Yet it is literally so.
Feed the world, and it can live, work, produce and march on. Starve it, and what becomes of railroads, banks, mills, mines, notes, mortgages and bonds? ”

“ When States, or cities, or railroads, or other corporations borrow money they issue bonds guaranteeing payment at a particular time. When an individual borrows money he gives his "bond" in the form of a promissory note. These bonds pass from hand to hand [229] and have a fairly constant value in the money market. They really represent the money trade to a much larger extent than does actual coin, so that the borrowing or loaning of money really means, to a very large extent, simply the borrowing or loaning of credit. If we borrow a $10 gold piece we borrow money ”

“ The value of this residuary share may be large or small, may increase or diminish, but in no case can the holder of such a share require any one, least of all the company itself, to redeem the certificate representing his interest at the price he paid for it, nor indeed at any price. If a man buys a $1,000 railroad bond, he knows that the railroad, if solvent, will pay him $1,000 in cash when the bond is due. ”

“ If the securities purchased for the funds are the concern’s own bonds, they should as a rule be valued at cost and the premium or discount amortized over the remaining life of the security. They may, of course, be carried on the books at par and the premium charged immediately against any income in the fund. The showing on the balance sheet should be in exact accord with the facts. If the bonds have been purchased and canceled together with their coupons, the amount of such cancellations should be shown as a deduction from the bond liability. ”

“ On the assumption that there is reasonable expectation that the bonds will be paid at maturity, their valuation on the balance sheet during the time they are held by an investor must have regard to the price paid as determined by the bond interest rate and the money market rate at the time of purchase. A bond bought at a discount and held to maturity is redeemed at par. If the bond is carried at cost until the period of redemption, that period would secure the credit for the difference between cost and par. ”

“ Working capital may be required; extensions of plant and market may be desirable; additional equipment and improvement within the plant itself may be advisable; the control of the plant of a competitor may prove advantageous; it may be deemed wise to fund floating liabilities; the refunding of liabilities soon to mature may become necessary; the financial policy may dictate the unification of several diverse forms of debt—these and other purposes may be served by the assumption of long-term debts.
Corporation Bonds
The most common type of fixed liability is the bond. ”

“ The form in which an industrial bond is issued is a matter of some importance. If the principal of the bond does not become due for a number of years, there is danger that the property will depreciate so far in value as to leave the bond without sufficient margin of protection. ”

“ They now not only keep people's money, but also collect their incomes for them. Many persons live entirely on the income of shares, or debentures, or foreign bonds, which is paid in coupons, and these are handed in for the bank to collect. Often enough the debenture, or the certificate, or the bond is in the custody of the banker, and he is expected to see when the coupon is due, and to cut it off and transmit it for payment. ”

“ Only so can the investor take advantage of its appreciation in value. In order for the improvement in security to be reflected in market price and thus add to the principal invested, it is necessary that a bond should possess a fairly active market. For this reason the industrial bonds which hold out the greatest promise of appreciation [73] in value are the larger, more speculative issues, which possess the greatest convertibility. The purchase of such bonds frequently results in substantial profits. ”

“ The four points above touched upon—safety, rate of income, convertibility, and likelihood of improvement in intrinsic value—are all inherent characteristics of every bond. The likelihood of favorable or unfavorable fluctation in market price is largely external in its nature and depends upon general financial and business conditions.
As a class, industrial bonds can not be said to possess much stability of market price. ”

“ These bonds, as you know, are a very desirable investment, running thirty years from the date of issue, with every guard and security that has been given to any bond of the United States, and we think as safe and desirable as the securities of any other nation. It is probably the bond into which all the debt of the United States will in time be converted. I hope you and your associates will be able to engage with me to place this bond on the market when $200,000,000 of the four and a half per cent. bonds have been sold. ”

“ The general laws of value, then, apply in the case of credit phenomena. We find nothing unique in essence in them. The juridical relations, also, in so far as they have economic significance, shade into one another. To buy a bond from a bondholder is purchase and sale. ”

“ Except in special cases industrial bonds are not suitable for a business surplus. It is impossible to find an industrial bond which combines all the characteristics necessary for that purpose. The requirements are great safety of principal and interest, a relatively high return, ready convertibility, and stability of market price. Many industrial bonds can be found which combine two of these requirements, some even which combine three, but the full combination, if it exists at all, is unknown to the writer. ”

“ Thus each increase in the quantity of money must raise the price of bonds sufficiently to exceed the expectations of some 'bull' and so influence him to sell his bond for cash and join the 'bear' brigade. ”

“ Article 7 Funds for redemption and interest payments of the Bond shall be put on alloation on an annual basis in the national general budget, and shall be appropriated to the managing bank in advance to be held on deposit in preparation for payment. Article 8 The offering and sale and the principal and interest payments of the Bond shall be managed by the Central Bank. Article 9 The Bond may be freely traded, pledged, or used as guarantee in official dealings, and may serve as guarantee reserve of financial enterprises. Article 10 Interest on the Bond is exempt from income tax. ”

“ Bonds issued by stock companies and corporations are really mortgages upon their resources. Such a bond is usually secured by a mortgage upon the company's plant, franchises, and assets, or some part thereof. Corporate bonds can only be issued by the consent and direction of the shareholders of the company or corporation. ”

“ When, therefore, the bond issue becomes due in a period of financial stringency, or even during normal times if the business has not been highly successful or if its credit has been impaired, the company may be unable to liquidate its assets and pay it off. ”

“ As the country grew in size, the large corporations—the railroads, for example—required greater capital in order to provide facilities for the handling of their growing business. It was impossible to provide this capital wholly by means of bond issues without destroying the proportion between bonds and stocks, which alone could give to the bondholders the protection of a substantial equity. ”

“ In a dispatch received by the Secretary of the Treasury yesterday from Mr. Conant, the syndicate agent in London, it was stated that the contract touching the four per cent. bonds is well received in London, and the new bond bids fair to be the most popular of American securities. There is no doubt that the bond has many advantages both for home and foreign investors. It has only one point of weakness, and that is, if the silver ring should succeed in getting an unlimited issue of legal tender silver dollars, this bond would be payable, principal and interest, in that coin. ”

“ If a fifty-dollar coupon on a bond bought seventy or eighty bushels of wheat instead of twenty or thirty, the advantage to the owner of the coupon was obvious. Moreover the advantage seemed to him entirely just. Creditors had suffered heavy losses when the Civil War carried prices skyward while the interest rates on their old bonds remained stationary. For example, if a man had a $1000 bond issued before 1860 and paying interest at five per cent, he received fifty dollars a year from it. ”

“ If the investments are so numerous as to require a subsidiary ledger for their record, where with each kind of bond accounts will be kept with its par, discount or premium, and interest, there is no objection to handling the controlling account on the general ledger by making the discount or premium adjustment directly to the bond account. ”