Promissory bond

“ 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. ”

“ One is the right to demand and receive at maturity the principal amount of the bond representing capital investment. The other is the right to demand and receive interim payments of interest on the investment in the amounts and on the dates specified by the coupons. ”

“ 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. ”

“ 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 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. ”

“ But it is only the same premium that the bonds are bringing in the market. In other words, as I said the other day, capitalists who can use their money as they please—put it out on mortgages, at interest, or in any other way—think the Government bond at the current rate of premium is a good investment for them. Now, the Government can buy those bonds at that premium and save a great deal of interest. ”

“ 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. ”

“ 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. ”

“ 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 only ways in which the money price of a bond or salable debt can vary at all are by variations in the rate of money interest and by changes in the degree of certainty of payment. Only so far as these features are affected by the changes in the volume of money will the value of bonds be affected. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ 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. ”

“ When we shall have reached the specie basis, the value of United States securities will be so high in the money market of the world, that we can command our own terms. We can then call in our Five-twenties according to the very letter and spirit of the bond, and adjust a new loan that will be eagerly sought for by capitalists, and will be free from those elements of discontent that in some measure surround the existing Funded debt of the country. ”

“ But if its bonds are to be marketed at heavy discounts and every bond sold is to be accompanied by a gift of stock, as has come to be expected by investors in such enterprises, the traffic will be seriously burdened to pay interest and dividends. ”

“ If a man has in mind a definite contingency, at a definite future time, for which he wishes to hold a store of value, he may well find that a high yield bond, or a loan upon real estate, or many other productive investments, will serve him better than money or bonds with wide market. So far as money is concerned, the "bearer of options" function is much more important than the "store of value" function to-day. ”

“ 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 owner of a negotiable bond and of the investment which it represents, if not the lender, stands in the place of the lender. When, by the gift of the coupons, he has separated his right to interest payments from his investment and procured the payment of the interest to his donee, he has enjoyed the economic benefits of the income in the same manner and to the same extent as though the transfer were of earnings and in both cases the import of the statute is that the fruit is not to be attributed to a different tree from that on which it grew. ”

“ 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 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. ”

“ It is proposed that government shall issue this money, but that it shall be convertible into a three per cent. interest-bearing bond; so that when money shall be so plenty that it will be worth less than three per cent. in business, it can be invested in bonds drawing three per cent.; and the bonds to also be reconvertible into money, so that the moment business shall demand more money than there should be in circulation—which would increase the value of money to more than three per cent.—the bonds would be converted into money again ”

“ 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. ”

“ 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. ”

“ 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. ”

“ When a country borrows money it gives a guaranty that the money will be returned at a particular time and that interest will be paid at regular intervals at a fixed rate. This guaranty is called a bond. In actual practice, instead of borrowing the money required and then giving bonds for its return, countries usually issue the bonds first, and sell them to the highest bidder. For instance, if our government needed to borrow $1,000,000 it would issue bonds for this amount, stating definitely the rate of interest to be paid, and call for bids. ”

“ Being thus deeply engaged, and a few only of us being bound to make payment of all, yea in a double bond; for besides our formal bonds, it was our credits and honesty, that made our friends rest and rely upon us, assuring themselves, that if we lived and it was possible, we would see them have their monies: Therefore we thought it our safest and best course to come to some agreement with the people, to have the whole trade consigned to us for some years ”

“ Seldom can the transaction be absolutely closed at both ends and any substantial profit be made. Most of the time the correctness of the bond expert's judgment as to how he can sell somewhere else what he has bought, is what determines the amount of money he will make or lose. ”

“ The second great source of demand originates out of the necessity of making payment for securities purchased abroad. So far as the American participation in foreign bond issues is concerned, the past few years have seen very great developments. ”

“ A widow, or a trustee, or other long-time investor, would prefer to buy bonds which guaranteed a regular yearly purchasing power over subsistence, rather than those which merely promised a given sum of money of uncertain value. ”

“ Tension in the bond and money markets is unfavorable to the continuance of prosperity, not only because high rates of interest reduce the prospective margins of profit, but also because they check the expansion in the volume of trade out of which prosperity developed. Many projected ventures are relinquished or postponed, either because borrowers conclude that the interest would absorb too much of their profits, or because lenders refuse to extend their commitments farther. ”

“ If he buys a bond he becomes a creditor of the company, without voice in its management, but entitled to receive his principal and interest when due under pain of forfeiture of the security which the company made over to the trustee to insure payment. If he buys stock, he becomes a partner in a business enterprise, exercising his proportionate share in the direction of the company's affairs, and sharing ratably in its profits and losses. In the one case he buys a promise to pay and in the other an equity. ”