Bottomry bond

“ If to meet the expenditures for the repairs, the master is compelled to take up money on bottomry, and thereby an additional premium becomes payable, that constitutes a part of the loss, for which the underwriters are liable. But in cases of a partial loss, the money upon bottomry is not taken up on account of the underwriters, but of the owner; and they become liable to the payment of the loss, whether the bottomry bond ever becomes due and payable or not. ”

“ 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. ”

“ 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. ”

“ Based upon the foregoing considerations it is of interest to inquire what degree of safety really attaches to the average industrial bond? How far does it meet the foregoing requirements? The question is difficult to answer. Industrial bonds vary greatly in point of safety, some issues possessing great strength and others being highly speculative. No general conclusions can be depended upon, and the investor is forced to consider each issue upon its own merits. ”

“ Let it be supposed that a firm or company has decided to invest $100,000 in the 5-per-cent equipment bonds of a good railroad maturing in three years, which can be obtained at par, merchant's paper then commanding about 51⁄2 per cent. After two years it becomes necessary for the firm to realize on its investment at a time when commercial paper is floated with difficulty on a 61⁄2-per-cent or 7-per-cent basis. Under such money conditions the equipment bonds could be sold on about a 6-per-cent basis, which would mean a price of 99 for a 5-per-cent bond with one year to run. ”

“ 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 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ But every one of us who holds a policy in a life insurance company, or whose house or furniture is insured against fire, or who has a deposit in a bank or savings institution, or who has a national-bank note in his pocket is as much interested in the value of our National bonds and in a certain sense as much a bond holder as the owner of a bond himself; for if the value of the bonds is attacked and impaired the security of your investment goes, to that extent, by the board. ”

“ 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. ”

“ Bonds rank very much as mortgages do in the priority of their liens. A first mortgage bond has a first lien on the property securing it; a second mortgage bond has a second lien and its claim is said to be junior to that of the first. No attempt can here be made to explain the distinguishing features of the above-named issues. Attention is called to them only because the reader of a balance sheet—an investor or prospective creditor—often must have a knowledge of the various classes of bonds and a detailed knowledge of the conditions of particular issues. ”

“ 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. ”

“ Do municipal bonds, either active or inactive, conform to the requirements of the business surplus? It can not be said that they do. Municipal bonds possess either convertibility without stability of price or stability of price without convertibility. Both qualities are necessary for a business surplus. The only form of municipal security which is at all adapted for the investment of a business surplus is a short-term issue of an active municipal bond. If it has only a very few years to run, its constant approach to maturity will invest it with the necessary stability of price. ”

“ 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. ”

“ 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. ”

“ If the bonus stock is given with an issue of bonds which could by themselves be disposed of only at a discount, the difference between the market value of the bonds alone and their par value should be charged to Bond Discount, and the rest of the loss on the transaction may be charged either to Bonus account or Discount on Treasury Stock. This distinction is important, as will be seen in Chapter XX where the true nature of bond discount is discussed. When data are available for making the separation it should always be done. ”

“ Then Spruce Supplies proceeds to issue three hundred thousand dollars' worth of five-year, seven per cent bonds against their holdings, which consist of timber limits, camp equipment, and logging machinery, valued at seven hundred thousand dollars. The Norquay Trust takes these bonds as security for a loan of three hundred thousand, recommended and authorized by Wall, Richston, etc., in their capacity as directors. The concern is supposed to create a sinking fund to retire these bonds at maturity. They begin timber operations with a flourish. For two years they pay the bond interest. ”

“ The holder of this bond is entitled to the benefit of the additional security of the sinking fund provided for in said mortgage, consisting of the net proceeds of the sales of the lands aforesaid, which are to be applied from time to time to the purchase of said bonds at their market value, not exceeding par, or to their redemption, as provided in the mortgage aforesaid. This bond will also be received by the company at par and accrued interest, in payment or exchange for any of its lands covered by the mortgage aforesaid, at the current cash price of the same as fixed from time to time. ”

“ 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. ”

“ 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. ”

“ There should be no coercion of any kind upon any holder, at home or abroad, to induce the acceptance of a substitute bond. I am happy to believe, that, with the judicious use of five per cent. Ten-Forties, all the coin necessary for such indepen [Pg 246] dent action may be assured in advance. Believing that such five per cent. bonds will be regarded by investors as preferable to coin, I would give the holders of the old bonds the first opportunity to subscribe for the new. Those who elect coin will make room for others ready to give coin in exchange for such bonds. ”

“ Morton, of the house of Morton, Bliss & Co., as an exception, to the bankers of Europe and the United States.
It was in the same months of 1871 that I recommended the issue of a four per cent fifty-year bond as the basis of the currency to be issued by the national banks. This proposition, which would have been advantageous to the banks, in an increasing ratio as the value of money diminished, was defeated by the organized opposition of the banks through an effective lobby that was assembled in the city of Washington. ”

“ In his Monday morning article, Philip King, of The Sun, compared the bond-market to the old story of the great psychologist who, dressed as a pedlar, offered on a Broadway sidewalk to sell five-dollar gold-pieces, warranted genuine, to the passers-by at $3.98. Never a fool so foolish, in the passing thousands, as to shake hands with fortune on the psychologist’s coin-laden tray. Now they would not buy bonds.
Of the millions of dollars of bonds that were sold, some were registered in the name of William Mellen or Richard Dawson, or of known stool-pigeons—clerks in their offices, etc. ”

“ A bond issue is always a liability and continues as such after maturity; but in the case of a stock redeemable at a given date, the point at issue is whether the failure of the company to redeem automatically changes the status of the owner of the stock from that of a proprietor to that of an outside creditor. ”

“ 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. ”

“ The bond market furnishes opportunity for investment to quite a different class of people from those interested in stocks. Security, conservatism, and a definite income are the main elements desired. Thus conditions may oftentimes be such that one market or another may be more favorable for absorbing an issue of securities, dependent on conditions in that market as much as on the credit and standing of the issuing corporation. ”