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.
Corporation bonds are issued for a period of years. They usually have
coupons attached which are cut off and presented at regular intervals
for the payment of interest. A bondholder of a corporation runs less
risk than a stockholder, first, as to interest: the corporation is
obliged to pay interest on its bonds, but may at its own pleasure
_pass_ its dividends; secondly, the bondholder is a creditor, while
the stockholder of the corporation is the debtor. On the other hand,
if a concern is very successful, a shareholder may receive large
dividends, while the bondholder receives only the stipulated interest.
A _bond_ is evidence of debt, specifying the interest, and stating
when the principal shall be paid; a _certificate of stock_ is evidence
that the owner is a part-owner in the corporation or company, not a
creditor, and he has no right to regain his money except by the sale
of his stock, or through the winding up of the company's business.
The name DEBENTURES is given to a form of municipal bond in common
use. Nearly all the large sums of money used by States and cities for
the building of State or municipal buildings, bridges, canals,
water-works, etc., are raised through the issue of bonds
(_debentures_), which are sold, usually at a price a little below par,
to large financial institutions, banks, and insurance companies.
Generally speaking, such bonds are good _securities_, and are
marketable anywhere.
[Illustration: A private bond.]
At different times the United States government has issued bonds to
relieve the treasury. These bonds are absolutely safe and are always
marketable. _Registered bonds_ have the name of the buyer
_registered_; _unregistered bonds_ are payable to _bearer_. _Municipal
bonds_ are issued by cities and other municipalities to raise money
for local improvements. If proper precautions are taken by buyers,
municipal securities may be considered among the safest and most
remunerative investments.
When a new railroad enterprise is undertaken its promoters often
expect to make the road not only supply the money for its construction
but also give working capital in addition. This is done by the issue
of mortgage bonds. Default in the payment of interest throws the road
into the hands of a receiver. The securities immediately fall in value
and are perhaps bought up by a syndicate of crafty speculators who are
permitted to reorganise the road and its management. This is the
history of many of our roads. There are exceptional cases, of course,
but the investor should be familiar with the facts before buying
railroad mortgages.
A BOTTOMRY BOND is a kind of mortgage peculiar to shipping. It is a
conveyance of the ship as security for advances made to the owner. If
the ship is lost the creditor loses his money and has no claim against
the owner personally. It is allowable for a loan made upon such a bond
to bear any rate of interest in excess of the legal rate. A vessel
arriving in a foreign port may require repairs and supplies before she
can proceed farther on her voyage, and in occasions of this kind a
bottomry bond is given. The owner or master pledges the keel or
_bottom_ of the ship--a part, in fact, for the whole--as security.
We have now upon the market stocks and bonds representing all
conceivable kinds of property. Not only are properties of many kinds
used to issue bonds upon, but many kinds of bonds are often issued
upon the same property. Thus we find among our railroads not only
first, second, and third mortgage bonds, but income bonds, dividend
bonds, convertible bonds, consolidated bonds, redemption bonds,
renewal bonds, sinking-fund bonds, collateral trust bonds, equipment
bonds, etc., until they lap and overlap in seemingly endless
confusion.
RECEIVER'S CERTIFICATES are issued by receivers of corporations,
companies, etc., in financial difficulties, to secure operating
capital; they are granted first rights upon the property and are
placed above prior lien and first mortgage bonds.