There are now a number of companies formed to purchase first mortgages
on new buildings, apartments, etc., and resell them to the small
investor for a series of payments. They specialize on first mortgage
bonds. _It is a good method, but be sure of your company._ In
order to define a first mortgage bond it is necessary first to explain
what a first mortgage is.
A mortgage is a legal paper covering a pledge of real-estate holdings
given by a borrower of money to a lender. The mortgage is held either
by the lender of the money or by a third party, known as the trustee.
Any mortgage represents the promise to pay a stated amount at a
specified time, at a legal rate of interest, and it transfers title to
the mortgaged property only in case the money for which the security is
given is not repaid. A first mortgage, therefore, is any mortgage filed
of record which precedes all other claims in the event the property has
to be sold to pay the holders of the mortgage or other creditors.
As has been stated above, every first mortgage bond is a direct first
lien on the property securing the issue. The importance of this
fundamental factor in investment safety would seem to be self-evident,
but it is a fact that the investment market is flooded today with a
vast number of securities, many of them regarded as conservative, which
do not even represent a legal obligation to pay, and which are entirely
dependent upon the prosperity of the issuing corporation for their
payment. The term “bond” is often a misnomer, the so-called bond being
merely a chance to share in profits, _if there are any_. It is no
different from a stock; they are debenture bonds, not secured bonds.
They should be very carefully scrutinized.
“BABY” BONDS
Although bonds are usually issued in one thousand dollar blocks, of
late years many corporations have split their bonds up into “baby
bonds,” or bonds of one hundred dollar value, in order to gain the
participation of the small investor and saver.
For example, among the high-grade (A) “baby bonds” for income only, the
author would recommend to the prospective investor such issues as the
following: Atlantic & Danville, 1st 4s, 1948; Bush Terminal Buildings,
5s, 1960; Western Union Telegraph Co., 6½s, 1936, and Armour and Co. of
Del., 1st 5½s, 1943.
In the middle-grade (B) list for income and profit there are Cuba
RR, 1st 5s, 1952; Western Pacific, 1st 5s, 1946; New York, Ontario
and Western, 1st 4s, 1992, and Kansas City Southern Refunding and
Improvement, 5s, 1950.
Among the more speculative (C) bonds for income and profit, also in the
“baby bond” class, come the Erie General Lien, 4s, 1996; Chicago Great
Western, 1st 4s, 1959, and Chicago, Milwaukee and St. Paul Convertible,
5s, 2014.
The writer urges that thought be given to this and similar bond lists
so that the student investor may become familiar with the yield he can
expect from most types. A study of the figures at which these bonds are
selling, together with the figures of their yield, etc., will indicate
what is meant by a “high-grade” bond and a “medium-grade” bond.