investments (2)

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934,1941,1952,by

DF.JORDAN

OPARTOFTHISBOOK

ANYFORM,BYMIMEO-

EANS,WITHOUTPERMIS-

EPUBLISHERS.

919

er,1920

922

3

4

1924

5

7

1927

1929

S0

931

N

st,1933

1934

1935

ruary,1936

Bt,1936

1937

,1939

1940

N

e,1941

uary,1942

uary,1946

1946

ust,1946

...September,1946

bruary,1947

,1947

er,1947

952

3

TATESOFAMERICA

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3/261

ON

placeinthewholefieldof investments

danpublishedthe1941 editionofJordan

ed,ProfessorJordanwouldmostcertainly

eflectthe influenceofWorldWarII andits

capitaland securitiesmarkets,thegrowing

eincreasedinterestincommonstocksasin-

yotherdevelopments.Itisthehopeof the

isionsmadeinthe lightofthesedevelopments

it andpurposeofthepreviouseditions,or

presentationthatcharacterizedProfessor

edition havebeenverythorough,with

onandsubjectmatter.Themoreimportant

o fiveparts.PartIincludesthe intro-

atureofinvestment;PartII isdevotedtoa

stments,PartIII toinvestmentprinciples

toinvestmentmechanicsandtheinvest-

oinvestmentanalysis.

nggeneralclassificationsofinvestment

othe separatedescriptionsofthemajor

stitutionsandsavingsbonds,discussedin

onwithinvestorsoflimitedmeans,has been

tinPartII.Whilethese typeshaveaspecial

r,their importanceisbynomeansconfined

weditiondevelopinconsiderablygreater

estmentprinciplesfoundinpreviouseditions

s"ProtectioninPurchasing"and"Protection

nofcorporatereorganization,formerlylo-

r,hasbeenincludedin theneweditioninthe

wayandindustrialsecurities.

stitutionalinvestorshasbeenexpandedto

teditionto reflecttheincreasedimportance

hangesinregulationsgoverningtheinvest-

nvestorsexpandsthepointof viewofthe

edtotheinvestoroflimitedmeans,toa con-

arioustypesandclasses.

urcesofinformationandthefinancial

eadofthematerialon investmentbanking

dthediscussionofsourceshasbeenex-

thin availableinvestmentinformation.


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5/261

TMENT3

ncialaspectsofinvestment;Invest-

Thesupplyofnewcapital;Thepro-

pital;Thedemandfornewcapital;

;Scopeofthebook.

S:

NS15

eneraltypeorgroup:Savingsgroup,

ateproper;Otherclassifications.

SANDSAVINGSBONDS.25

ngs.1.PostalSavingsDeposits.

ercialBanks.3.DepositsinMutual

tsinSavingsandLoanAssociations.

SANDSAVINGSBONDS

onds.6.LifeInsuranceandAnnuities

tmentaspectsoflifeinsurance;Types

or'spointof view;Investmentmerits;

ORPORATEBONDS..51

istics;Reasonsforissuingbonds;Im-

g;Bondindentures;Thebondinstru-

curity;Titlesbaseduponpurposeof

rmof issue;Titlesbaseduponredemp-

ticipation;Theinvestmentpositionof

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TOCKS71

istics;Legalpositionofthe stockholder;

redstockgeneralnature;Preferred

sandvotingrights;Classifiedcommon

nvestments;Guaranteedstocks;Com-

es;Advantagesofcommonstocksas

gesofcommonstocks.

nagement

ES93

tplanning;Determinationofinvest-

entrequirementsorconsiderations;

ES(CONTINUED)...118

zingrisk;Managementofinvestments

securities.

TORS134

titutionalinvestment.1.Commercial

mercialbanksasinvestors;Typesof

estrictions;Significanceofinvestments

cies;Profitsandlossesonsecurities;

2.SavingsBankInvestments:Gen-

ns;LegalinvestmentsinNewYork

policy.3.InvestmentsofSavingsand

alinvestmentcharacteristics;Legal

ts;Secondarymarkets.

STORS(CONTINUED)..152

atureofatrust;Typesof personal

;Legalrestrictionsontrustinvest-

strustinvestments;Commontrusts;

InvestmentofEndowments.6.LifeIn-

ments:Scopeoftheindustry;Sourcesof

stmentrestrictions;Newerformsof

policy.

RS171

entmedia;Factorsmakingforindi-

ationofinvestmentprinciples;Illustra-

tsoftheyoungfamily,Theestablished

ablishedbusinessman,Thewidowor

yinvestor.,

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MENTINFORMATION...187

ment;Dailybusinessandfinancial

ndfinancialperiodicals;Monthlybusi-

als;Quarterlyinvestmentandfinan-

eriodicals;Generalperiodicals;In-

sGovernmentsecurities;Information

ationonmunicipalsecurities;In-

general;Informationoncompaniesand

Thestatisticalandratingservices;In-

railroadsecurities;Informationon

urities;Informationonfinancialin-

es;Informationonrealestatesecuri-

nsecurities;Securitymarketfore-

NANCIALPAGE....203

g;QuotationsonUnitedStatesGovern-

ondpricequotations;Listedstock

e-counterquotations;Otherinforma-

volumeof trading;Securityprice

usinessandpriceindexes;Corporate

dityprices;Otherinformation.

G213

ities;Economicfunctionofinvestment

entbankinghouses;Internalorgani-

nandcompetitivebidding;Thebuy-

tingofsecurities;Pricingtheissue:

";"Best-efforts"selling;"Stand-by"

ecurities;Theadvisoryfunction;The

ervicefunction;Federalregulationof

ederalsecuritiesregulation;State

S238

sesofsecuritiesmarkets;Functionof

esoflistingtotheinvestor;Organiza-

erationsontheNewYorkStockEx-

ngeAct;TheSecuritiesandExchange

nandregulationofexchanges;Registra-

gulationofdealersand brokers;Re-

gby"insiders";Proxiesandtheir

;Manipulationofprices;Specialoffer-

utions;Unlistedtradingprivileges;

rket.

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SECURITIES255

orders;Buyingnewsecurities;Buying

ies;"Market"and"limit"orders;Day

sorders;Functionofthespecialist;

g;Privilegesandoptions;Buyingon

ndwarrants;Buyingandselling

ery;Commissioncharges;Transfer

tionfees;Transferofsecurities.

VESTMENT271

ematics;Mathematicalterms;Accrued

old"flat";Accrueddividendonstocks;

onds;Compoundinterestformula;

ondtables;Yieldsoncallablebonds;

bscriptionrights;Stock-purchase

MENTS289

s;Federalpersonalincometaxes;Capi-

alpersonalincometaxeson divi-

taxes;Stateincometaxes;Federal

axes;Stateestateandinheritance

anceofestateandinheritancetaxes;

axesonsecurities;Taxationofinsur-

andpensions.

RNMENTSECURITIES..305

Federaldebt;The Federaldebt

tionofmajortypesof debt;Federal

ialbonds;Investmenttests;Thetest

rinvestmentcriteria;Taxposition

ceandyieldrecordofGovernment

ernmentbonds.

hofstatedebt;Typesofstate debt;

sandusesof revenue;Statesover-

ngnesstopay;Tax-ratelimitations;

sofstate bonds;Yieldsonstate

ebonds;Investmentpositionofstate

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6

unicipalagencies;Sourcesandusesof

osesofissue;Growthofmunicipal

obligations;Abilitytopay;Willing-

e;Formof municipalbonds;The

s;Thetaxpositionofmunicipal

366

vestment;Volumeofprivateforeign

foreignsecurities;Specialfactors

s;Publicissues;Defaultsonforeign

porateissues;Barrierstotherevivalof

t;Protectiveagencies;The"World

foreignbonds;Investmentposition

UALITY:

ES384

aningofquality;Defectsofthe

ity;Arevisedconceptofinvestment

tofquality;Testsof"internal"risk;

coveryofprincipal;Otherfactorsaffect-

actorofmarketability.

401

eindustry;Regulation;Railroadsys-

nces;Operatingdata;Incomestate-

eetanalysis(assets);Balancesheet

adbonds;Railroadstocks;Consoli-

Futureprospects;Railroadsecurities

RITIES439

es;Thefranchise;Regulation;Terri-

ofmanagement;Publicownership

alancesheetanalysis;Typesofsecuri-

alysis;Electriclightandpower;Sum-

ests;Thegasindustry;Gascompany

dustry;Telephonecompanyanalysis;

legraphcompanyanalysis;Thewater

analysis;Thelocaltransitindustry;

nalysis;Theholdingcompany;Hold-

blicHoldingCompanyActof1935;

arketstanding;Securitiesanalysis.

IES475

y;Accountingproblems;Industrial

theindustry;Incomestatements;Bal-


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ENT

chapteris todiscusstheeconomic

ofinvestmentsandtoprovideanintro-

dyof investmentprogramsandinvest-

iscussionis:(1) economicandfinancial

investmentversusspeculation,(3)the

hedemandfor newcapital,(5)there-

opeofthe book.

pectsofinvestment.Investmentmay

veemploymentofcapital.Inthe eco-

edirectionofsavingsor accumulated

eswhichfillaneconomicneedandwhich

return.In thenarrowertraditionalsense,

tedto"capitalgoods,"thatis, goodsused

oods.In thebroadersense,theuseof

oducebenefitsofasocial naturemust

businessuseoffundsthat,in additionto

andplantcapacity,mayalsobuildup

heinvestorsorsuppliersof capital,

mentofpresentfundsforthe purposeof

egardlessofwhetherthefundsare de-

einthe economicsense.Thus,thepur-

ndwhoseproceedsaredevotedtowar

ninvestmentasisthe purchaseofacor-

palisinvestedin additionalplantca-

bygovernmentalbodiesisrarelyfor

governmentbondsrankhighasin-

torsusuallyreceiveinterestpayments

e.Presentfundsareexchangedfor

haseofthe righttofuturefunds(or the


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MENT

tmentfromtheindividualpointofview.

ation.Thelineofdemarcationbetween

onisdifficulttodrawbecauseofthe

termsare used.Thedifferenceismore

hetraditionalsense,thedistinctionis

ofriskassumed:speculationinvolves

ecuritiesorothermedia,whereasinvest-

ionoflow-riskmediawhosefuture

n.Thedifficultywiththisdistinctionis

uturefundsinvolvetheassumptionof

onoffuturefundsdependsonconditions

foreseen.Riskisamatterof degree,

skandhigh-riskis oftenpurelyarbi-

uritiescouldberankedin orderofrisk,

obligationtotheweakestcommon

ebetweeninvestmentandspeculation

onbetweeninvestmentandspecula-

bove,namely,thatinvestment,toinsure

edbyacontractbya responsibledebtor

youtlayat adefinitedatewitha definite

rmanyyearsstocksas aclasswere

mentcategorybecausetheyrepresented

acttorepaya definitesum.Theassump-

heirbasiccharacter,suchinstruments

ntriskasto placethembeyondthepale

ertainlytherecordofstocksasa classis

nds;yetthereare high-riskbondsthat

stocksthathavean eminentlyrespect-

It wouldseemillogicaltodignify

n investmentandignoreastrongly

becauseitrepresentsownershipand

oss(and ofprofit).

enthetwotermsisfrequentlydrawn

orwhichthecommitmentismade.The

erestedinthequickturn,the investor

thereisan elementofvalidityinthis

ationsandindividualsmakeshort-term

ahighdegreeofprotection,andmany


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ENT

dtoholdonfora longperiodinthehope

lbe madeovertheyears.

dinthe motiveofthesupplierof

o beinterestedinincome;thespecu-

on.Thedifficultywiththisconceptis

nvestmenttheownershipofsecurities

rentreturnbutwhichrepresenta

nvestmentandanincreaseinprincipal

entofsubstantialsize.Itwouldinclude

ipofsecuritiesofveryhigh riskwhich

yhighincomethat issubjecttosudden

arance.

distinctionsbetweenthetwocon-

cult,ifnotimpossible,todrawan exact

eareextremes,ofcourse,thatwouldbe

onesituationsthatwoulduniversally

ntoras speculation.Amuchmorefruit-

eamountandformofthefinancial

rposes,andgoalsoftheinvestor.Some

dmustbe contentwithaverymodest

considerableriskandcanbasetheir

ahighreturn.Someinvestorsmustcon-

ndsandotherrelativelysafecommit-

heincomethattheirplansrequire;others

esintheirplans,providedthat the

anddiversificationofsuchholdingsare

einvestorscanreasonablyacquireshort-

ossiblylargeriskwhileothersmust

mthatminimizesrisk,emphasizesin-

nocapitalappreciation.

tagoodinvestmentisa successful

sthatitis theendresultthatdetermines

ceptisusefulin thatitsuggeststhat

ndthatsomedegreeof riskisinevit-

erous,however,inthatitsuggeststhat

ectionmaynotbeworthwhile.There

uritiesandothermediato fitawide

.Theproblemofinvestmentisto relate

anintelligentfashion.


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ENT

dconceptofinvestmentimpliedin

hisvolumewillexcludethoseoperations

ytotakeadvantageofrapid changesin

ities.Thereisa multitudeofdiscussions

votedalmostentirelytotheanalysisof

andtrendsthatmaybeof interestto

estionableresultsofsuchoperations,

inginteresti nspectacularprice

ortantlong-rangeinvestmentgoalssug-

wouldbe performedbyconcentrating

onallyassociatedwithinvestmentand

allyassociatedwithspeculationand

Newcapitalis createdinanycom-

orethanitconsumes.Theindividuals

ssthissurplus naturallydesiretoput

ecisionto postponeimmediatecon-

mepreferenceorasavingsincentive.

ievethat theirsurpluswillbemore

retime,asevidencedinpurchasinga

nga pensioncontribution.Inthelatter

byamoreimmediateincentive,suchas

ractiveinterestpayment.In either

meavailabletouserseitherdirectly

uritiesor indirectlythroughthefinan-

savingsareheld.

ouldalwaysbeavailabletoindi-

rnmentusersevenatnegligibleinterest

orablerate ofreturnactsasa powerful

venatthe lowinterestratesavailableto

volumeoffunds availableforinvest-

sly.Thesupplyofnewcapitalis de-

he nationalincomethatissaved.

ryearssawatremendousgrowthin

din relativeterms.Incontrasttothe

hensavingswere$3.7billionsor 4.4per

hefigurereachedatotalof $9.8billions

ndapeakof$35.6billions or21.6per

1944.Afterthis year,savingsdeclined


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ENT

onsor5.3per centofpersonalincome

naccumulationoffundsinthehands

mpressiveeffectonyieldsinthebond

hroughsavingsinstitutions,andbe-

t.

tionofindividuals'savingsisfound

sthat aredevotedprimarilytothe

Intheyears1941 through1950,deposits

mgrewfrom$1.3 to$2.9billions.Dur-

od,timedepositsof allbanksinthe

om$26.5to$56.5billions;assetsof life

wfrom$17.5to$63.7billions;assetsof

onsrosefrom$8.7to $16.9billions.The

offundsin savingsinstitutionsput

marketand hasbeenresponsiblein

lowinterest rates.Duringthesame

atesSavingsBondsoutstandinggrew

billions,indicatinga diversionofa

ngsfromtheregularcapitalmarket.The

utstandinghaltedin1951.

ofsavingsisrepresentedbybusiness

tmentorexpansion.In1941,corpora-

cesandundistributedprofitsamounted

reachedits peakof$19.5billionsin

entofcapital.Capitalflowingfrom

nstitutionstocorporateandpublic

mplishmanydifferentpurposes.The

nctionsare:

prise.Promotersofnew enterprises

essoftheir personalfunds.Inaperiod

ages,thedifficultiesofinitiating a

aremanifest.

onofan establishedenterprise.Many

eedoutsidecapitalforthepurchase

equipmentandforworkingcapital

entofexistingfacilities.It isfre-

striestoseeknewcapitalin orderto


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ENT

entandtherebyreducecostsandlower

vements.Governmentalbodies

yinordertospreadthecost ofperma-

ongperiods.

nditures.Duringperiodsoflowtax

ditures,governmentalbodiesborrow

ficitsin fiscalbudgets.

e.Exportstonations whicharenot

tsarecustomarilysettledbypromises

whichpromisesareinturn offeredto

swartimeoutlaysbytheGovernment

tionsarecontinuingin theformof

andeconomicrecovery.Theseoutlays

ment-financed.

umption.Companieswhichmake

iscountinstallmentpurchasecontracts

tlargerdemandsfor theirservices.

al.Thedemandfornewcapital

eenterprisesofthenationwhichdesire

acementpurposessuchasthoseout-

nycorporationshavereliedontheir

uchoftheircapital needsinthepost-

ndvirtuallyallgovernmentalbodies,

50,themostimportantsinglein-

e(orsupply ofinvestments)was,of

ederaldebtfrom$45 billionsatthe

$278billionsearly in1946.Subsequent

tion,buttherecentreappearanceof

enstopushthedebtbeyondthe pre-

ontoFederaldebt, theannualamount

rporationsecuritiesissuedfornew

refinancing)rosefrom$2.9billions

onsin 1948;1949and1950sawa de-

billionsinthelatter year.

.Buteventhetremendousincrease

ingin thepost-Warperiodfailedto

forinvestment,atleastinsofar asbonds


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ENT9

pringof1951,the peggingbyFederal

onlong-termTreasurybondsat 2.5per

earanceofrisinginterestrates,andthe

nvestmentforcedtherate onTreas-

entin 1950andtheyieldon highest-

oaslowas 2.6percent.In1951 these

ercent,respectively.Suchlowyields

nstitutionalandindividualinvestors

riodofrising prices.

dsonbonds,dividendyieldsoncor-

erygenerousinpost-Waryears,asin-

omparisonofyieldonhigh-gradecor-

aseries)andcommonstocks(Moody's

:

nStocks

edinspiteof certainforcesthat

yof stocksavailableforinvestment.1

themarketwithnewstockissuesin

0,forexample,about60percent of

orkingcapitalandplantrequirements

profitsanddepreciationallowances,

fromnewstockissues.Inadditionto

ues,thoseoutstandinghavetendedto

einto lodgingswheretheyareat

dedintoinvestmentcompanyport-

ntfunds,and,toacertainextent,pen-

hesespecialinfluencesonthesupply

avecontinuedtoevaluateearningsand

1followingthe"unpegging"ofthesupportpriceof

suesinthatyear,but thespreadbetweenyieldsonbonds

llymaintained.


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ENT

srates,reflectingahesitancytotake

gandvigorouseconomy.

weentheyieldsonhigh-gradebonds

mentsandon commonstockshas

er onthepartofmany investorswho

nd-minded.Butthechoicebetween

eenanymediaofinvestments,cannot

hespecialneedsof theindividualin-

sonwhohas savingstoinvestand

ntlyandprudentlyfacesmanyprob-

onsideration.Thefirstofthese isthe

orpurposestowardwhichsavingswill

ngofa logicalprogramthatwillfulfil

involvesdecisionsconcerningtheforms

ke.Theinvestormustbeacquainted

ofinvestmentmediathatare available,

layon eachtype.Chapters2through

outlinethesealternativesin general

rsavingsinstitutionsand corporation

presentthemostcomplexities.

sionsconcerningthetimingand

ofaportfolio.Chapters7through11

proachesthatmaybe helpfulin

ualsand forinstitutions.

nvestmentplanning,oncethegoals

ebeendetermined,isthe analysisand

tmentsituations.ThewholeofPartV

adiscussionofthis probleminsofaras

Inordertofulfiltheir aims,mostin-

afetycontributedbydiversification

vestments.Buttheinvestoroflimited

cationdifficultifnotimpossible,ifat-

epossibilitiesofindirectinvestment

onsbecomesanimportantquestion.

nalysisofsuchinstitutionsare likewise

ningandmanagement,theinvestor

thevarioussourcesofinvestmentin-


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ENT

whowtofollowinvestmentnewsand

y.Sourcesofinvestmentinformation

2,andaids totheintelligentreadingof

estedinChapter13.

nvestmentsinparticular,corporate

theoperationsofthesecuritiesmarkets

finvestmentknowledgewithoutwhich

factingwithignoranceconcerning

heinvestmentmechanism.Thesemat-

ers14 and15,whileChapter16is

eaderwiththe proceduresthrough

ordersareeffected.

aintedwiththebasicmathematical

entcalculations.Particularlyimportant

ntyield,orrate ofreturnexpressed

talinvestment,which,inthe opinion

reflectsthedegreeofriskin anygiven

basicconceptsofinvestmentmathe-

atterofChapter17.

xconsiderationsareenteringinto

lanningandselection,andthissitua-

manyyearstocome.Soimportantare

beensingledout forspecialattention

oreferredtoelsewherewhereverim-


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25/261

NS

chapteris tooutlinethevarious

athatareavailabletosatisfy there-

eof investmentgoals,andtoclassify

portantinvestmentcharacteristics.

areofthe ratherremarkablerangeof

nvestmentprogramcanbeworkedout

vestorhasfamiliarizedhimselfwith

schaptertodiscusstheinvestment

e classified,northetypesofinvestors

bemost suitable.Suchmaterialis

on.Theorderoftopics isindicatedby

ication.

TMENTMEDIA

alform

mercialbanks

gsbanks

loanassociations

tycontracts

onds

orporations


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26/261

es,railroads

ompanies

k

ock

ecurities

ity

entrequired

againstpricechanges

ypeorgroup.Investmentmediacan

heirgeneralform.Theveryform in

dinsomeinstancesencourages,andin

heselectionofatype.Somearesimple

morecomplexproblemsofanalysisand

miliartoallinvestors,whileothersare

tmentthinkingofmanyindividuals.

eforonetypeof investorthanforan-

pincludestheclaimsthat investors

ovidehquidity,modestincome,and

es)littleornoriskof lossofdollar

ajorinvestmentmediabelonginthis

osits,savingsdepositsincommercial

savingsbanks,accountsinsavingsand

ranceandannuitycontracts,andUnited

manddepositsincommercialbanks

cludedfromthei nvestmentcategory,

einvolvedinany over-allinvestment


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27/261

NS

intofliquidityandavailabilityof funds

sandothertypesof media.

dia(discussedinChapter3)mightbe

nking-typeinvestmentsheldprimarily

someincome.Reservesinlifeinsur-

esentsavings,provideliquidityintimes

ircash-surrendervalues,andarebuilt

erest.Althoughtheprimaryfunctionof

esistoserveas insurersofriskrather

h,mostinsurancecontractscombine

ction.Itseemsbest, therefore,toin-

ectsoflifeinsuranceinthe discussion

tions.

stments"omitlifeinsurance.Yetlife

egralpartof mostinvestmentprograms.

mplexitiesofinvestmentinsecurities

entcategoryinonlyalimitedsense.But

ntofthesubjectofinvestmentswould

shouldhavetoppriorityin mostfinan-

only meansbywhichmostinvestors

statefordependents.Andsometypes

containasignificantsavingsorinvest-

ableduringthe lifeoftheinsured.These

ndthemeansbywhichprovisionfor

ghannuities,are discussedinChap-

Bondhasbecomethemostimportant

um.Theamountoutstandingexceeds

banksintheUnitedStates.While

magainsttheFederalgovernmentas

ization,andwhileit differsinseveral

aimrepresentedbya bankdeposit,

t-typeinvestmentwithrespecttoli-

strateofincomejustifyits classification

ategory.Savingsbondsarediscussed

housandsofsecuritiesofall kinds

or.Thesemaybe classifiedinalarge


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28/261

wingclassificationisbasedontypeof

to discusstheirinvestmentqualifica-

dinggroupsreceiveextensivetreatment

Fromthestandpointofvolume,gov-

stplaceinthe investmentscene.Their

ualandinstitutionalinvestorscan

zed.Inadditiontoallbanks,allinsurance

ndsoftrustestates,endowmentfunds,

vernmentagencies,andinvestingcon-

ividualsowngovernmentsecurities.

dualsheldover$66billionsof Federal

ntsecuritiesarediscussedlaterinthis

):(1)directandguaranteeddebtof

sof states;(3)obligationsofpolitical

bonds;(4)bondsofforeigngovern-

eeding$250billions,canbesubdivided

ty,bytaxstatus,by ownership,by

ofissue,andbyothercharacteristics.

sarelikewisedivisibleintovariouscate-

ncludeissuesofcorporationsandgov-

mphasizedinthis volume.Theinterest

reignbondsdiminishedgreatlyafter

withsuchbondsinthe 1930's.Direct

deralgovernmentaidinvariousforms

cedprivatepurchaseofforeignbonds

ericancapitalisgoing abroad.Never-

stantialvolumeofforeigndebtheldin

orporations.Theseareoftwogeneral

dstocks.(Corporatenotes,represent-

aturity,arein effectshorter-term

atiswidelyusedin investmentcircles

oninto:(1)industrials,includingmanu-

,service,andextractiveconcerns;(2)

oldingandoperatingcompaniesin

as,telephone,telegraph,water,traction

miscellaneous;(3)steamrailroads.Each


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NS

e furthersubdivided.Intheindustrials

umberofsubclassificationsisusedin

assifyingbusinesscorporationse-

atusofownerherewefindtwogeneral

ratenotes)andstocks;(2)bytypeof

eis avarietyofsecuredinstruments,

onds,andtwogeneralclassesofun-

enturebondsandstocks;(3)bypurpose

securitiesareissuedforspecificpurposes

ancegeneralworkingcapitalandcapital

egreeofparticipationinearnings,that

d oranuncertainincomemostbonds

fixedrate ofreturn,althoughthereare

ossibilityof ahigherincome,while

drate,receivingthenetincome,large

ributedasdividendsatthediscretionof

ndredemptionfeatures.Stocks,both

avenomaturitydate,sincetheyinvolve

.However,thecallfeaturein preferred

entits fixedliquidatingvalue,arechar-

mountofanypaymentof capitalto

conditions.Bonds,withveryfew

ematuritydateandusuallyinclude

beforematurityattheoptionof the

habovearesuggestiveofmanythat

d comparingcorporatesecurities.

ater chapters.Chapters5and6are

descriptionofthe characteristicsof

taingeneralconclusionsarereached

entmerits.Theprocedurefortheanaly-

utility,and railroadsecuritiescom-

ters23-26.

ompanies.Thesecuritiesissuedbv

efinancialinstitutionsplayan important

ramsofmanyindividuals:sharesin

sininsurancecompanies,especially

es;anddebentures,preferredstock,and


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30/261

mentcompanies.Theseinstitutionspro-

einvestorcan makeanindirectcom-

curitiesand otherinstruments.Their

ializedandtheanalysisoftheir securi-

ionapartfromthatof corporatese-

estmentcharacteristicsandmethods

he financialgroupprovidethesubject

9.

ndbonds.Obligationssecuredby

iveplacein investmentportfolios,es-

tions.Theirspecializedcharacterand

stbeconsideredin theiranalysisjustify

instrumentsapartfromcorporatese-

sionofrealestatesecuritiesis found

ditionto theownershipofrealestate

ectinvestmentinrealestateproper

manyinvestmentprograms.Themost

estmentistheownershipof domestic

hemostsignificantsingleinvestment

n ahome.Theinvestmentaspectsof

eonlyones thatmustbetakeninto

eownerorthepotentialhomeowner,but

kedorgivenscantattention.Considera-

totheinvestmentfactorsin theowner-

rincomeandforoccupancy.

ingsofmanythousandsofindividuals

rchaseorexpansionofthe businesses

allerconcerns,proprietorsandpartners

eirsavingsto abusinessventure.

of investmentwouldinvolveadis-

ionandmanagementitself.Further-

e'sownbusinessare notsubjectto

etplace.Forthesereasonsnoattemptis

nsiderwhattomanypeopleisthemost

entofall.

ditiontotheaboveclassificationsby

thergroupingsof investmentsispos-

gestive:


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31/261

NS

nvestoris acreditorwhenheholds

ntbonds,hasasavingsaccountinabank

mortgage,or hasalifeinsuranceor

mostpartthesemightbe called"fixed-

anownerofso-called"equities"when

mmonstocksorrealestateor hasa

redstockbelongsin theownership

orsinthistypeof securityplaceit,for

fixed-incomecategorybecauseofits

xedliquidatingvalue.)

areunsecured.Somedebtinstru-

bondsofcorporations,andalldirect

te,andmunicipalgovernmentsare

hattheyhavenolienon specificassets,

misestopayand soaresecuredbygen-

helackof specificsecuritydoesnot

eakness.Someofthestrongestcorporate

governmentbonds,receivethehighest

ured."Deposits,andclaimsagainstin-

kewise"unsecured."

equitieslackamaturitydate be-

ntpromisesto pay.Asnotedpreviously,

shavecertainfeaturesthatgivethema

peciallythecallorredemptionfeature

ttheoption ofthecorporation.Shares

oftheopen-endormutualtyperepresent

eondemand.Thisgivesthemmaturity

ue.Perhapsitwould bebettertosay

herthana definitematurity.Debt

eptions,matureataspecifiedtime

hecaseofTreasurybonds.Lifein-

nuitiesmatureatdeathorretirementage.

ity.Investmentsdifferconsiderably

ityafactorthatisofconsiderable

stors.Listedsecuritiesandthosetraded

enjoysuperiormarketability.Butmany

eadymarket.Deposit-typeinvestments

sensethattheyare liquidcashis

disadvantageofmortgagesandofreal


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32/261

marketability,especiallyindepressed

suranceandannuitycontractsare

mitedconditions,althoughthecash-

ancepolicyisavailableon demand.

variesgreatlyfrominvestortoin-

sential,andincomemayhavetobe

tatusofinvestmentsbecomesmore

ncomeandestatetaxesincreaseandas

ertax brackets.Thesearchfortotal

animportantpartin theplanningof

gnificanteffectonthe pricesand

.Thetaxstatusof securitiesisdiscussed

entrequired.Investorsdifferinthe

llingand abletoassumetherespon-

vestmentcommitments.Theappealof

entsisthereforeaffectedbytheirrela-

reefactorsdeterminewhetherornot

tleor muchtimeandeffortinselecting

ents:(1)therelativesafetyof the

etowhichtheproblemsof management

nd (3)whetherornotthe investment

haracter.UnitedStatesSavingsBonds

yaresimpleandstraightforward.An

seofitsrelativesafetyandbecause

ssumestheproblemsofportfolioman-

ksthecare-freequalitybecauseithas

nstantattentionandspecialtraining

icationbydegreeof riskcanbein-

possibleexceptionofUnitedStates

Savingsdeposits,riskofloss ofdollars

oundin allinvestments.EvenTreas-

marketvalue.Depositsininsuredbanks

ciationsmayapproachbeingriskless

erned,buttheincomederivedfrom

doesvarywiththe times.Lifeinsur-

tee"arateatwhichtheirreservesare


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33/261

NS

ompanieshavearemarkablerecord.The

securitiesruns thewholegamutfrom

mbondstoworthlessstocks.Bondsas

ecordthanstocksasagroup.Yet each

ein respecttoquality.Andindustries.

yofchangingininvestmentmerit.

againstpricechanges.Allinvest-

estopayincome,principal,orbothin

e vulnerabletothechangesinthe

ollar.Only"equities,"anddebtse-

orthathave participationorconvert-

eofa hedgeagainsttherisein theprice

rfectlyorinvaryingdegrees.Oneof

withsavingsandinvestmentisthatthe

dgeagainstinflation,"thelessablethe

hedge.Theassuranceofdollarsofin-

portantto theinvestoroflimited

edin holdingmostequitiesshouldnot

finvestinginstitutionssuchasfire

investmenttruststhatholdportfolios

eakandspeculativebondsandpreferred

appreciationandofincreasedincome

protectthebuyingvalueoftheinvestor's

toa certainextent.Thisfactorisvery

vestmentfundisdesignedtoprovide

ses.Itconstitutesa strongappealfor

setypes,alongwithfixed-incomeobli-

entportfolios.

problemistoselect(orhave some-

riatesecuritiesthat(1) fithisneeds

f riskthathecanaffordto assume,

willbe commensuratewiththatrisk.

zethatthere aremanygeneraltypes

ndividualoutletsforthe placementof

term"investments"meansonlyse-

monstocks;othersworkoutacare-

atutilizesmanyofthe variousgroups

ectionswithinthosegroups.


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34/261

uritiespresentthemostproblemsof

ebulkofthis volumeisdevotedtothem.

discussionoftheirgeneralcharacter-

rtionof thevolumeisdevotedtotheir


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35/261

ND

chapterandof Chapter4isto dis-

ctsofclaimsagainstthevariousinstitu-

ofindividuals,provideamodestreturn

dreadyto providecashondemandor

of discussioninChapter3is:(1) Postal

depositsincommercialbanks,(3)de-

nks,(4)accountsin savingsandloan

overs(5)UnitedStatesSavingsBonds,

nnuitycontracts.Thefirst fourof

nvestments.UnitedStatesSavingsBonds

,in characterofthedebtor,andin

tthemotiveslyingbehindtheir pur-

requirementsthattheyaredesigned

ethatpertainto thedeposit-type

entaspectsoflifeinsuranceandan-

ydevotedtosavingsinstitutionsproper

n.Perhapsthechiefjustificationofthe

tthat lifeinsurancecompaniesin

eformofpremiums,andthat mostlife

ainanimportantsavingselement.

etremendousaccumulationofsav-

sindicatedbytheincreaseoverthe

ctingsuchsavings.Thefollowingyear-

ofthetrend (inbillionsofdollars):1

eBulletin;DepartmentofCommerce,Bureauofthe

ctoftheUnitedStates;HousingandHomeFinance

s.


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36/261

rcial

(net

d

osits

ons-

....

nding

mwassetup in1911forthe purposes

fprovidinga safedepositoryforsav-

tswasverysmall untilbankscame

930's.SincethentheSystemhascon-

rablevolumeoffunds,especiallyduring

ercentrateof interestbecamerela-

yamuchlargervolumethatwouldhave

ntoSavingsBondsin recentyears.And

bankdepositshas alsorestrictedthe

m.

reverysimilar tobankdeposits,

tesGovernmentisthecreditor.Only

ounts.Depositsareevidencedbycerti-

tionsoffrom$1to $500.Alimitof

osed.Withdrawalsmaybemadeonde-

cent,orlessin statesplacingalower

ts,asin NewJerseyandMississippi)

hat obtainableonbanksavingsde-

vingsSystemaccountis oneofsafety

come.Onedisadvantageisthatin-

annually,butmustberedepositedby


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37/261

ercialBanks

0bankingofficesinthe UnitedStates

imedeposits,ofwhichthebulkare of

edasthose notsubjecttocheckandon

e30days'noticeof intentionofwith-

ccounts,whichbearnointerestand

ningonlyinsofarasimmediatelvavail-

ingsaccountsincommercialbanksmay

nvestmentmedia.Theybearinterest

m1to2 percentandimmediateliquid-

hthe bankhastherightto demand

rightisrarelyexercised.Insome states

epartmentmustbe segregatedfromthe

he stateauthoritiesrestricttheamount

dandissue anapprovedlistofsecuri-

maybe invested.Thereisnosuch

caseofnationalbanks.

savingsdepositsaresubjecttothe

oardofGovernorsofthe FederalRe-

emberbanksareconcerned.Atthe

minterestrateis setat2/2per cent.The

bankmaynot inanyeventexceedthe

ystatebanksonlikedepositsunder the

thememberbankislocated.Invery

tionforfundsamongbankshasbeen

ofthesaver,for interestratesonsavings

aterialincrease.By1951somebankshad

has2per cent.Butingeneraltherates

saverageaboutVkpercentandare the

onscompetingforfunds(commercial

nks,andsavingsandloanassociations).

epositsincommercialbanksareineffect

ausetheymustmaintainliquidity,the

earnasmuchontheir thriftaccounts.

banksare membersoftheFederal

ation,whichinsuresindividualaccounts

asonmostdepositorsininsuredbanks

outthesafetyoftheir funds.Theyhave


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38/261

allrate ofreturn.Buttherate isso

untsareconsideredprimarilyasreserve

ofincome.

ftimedepositsinvariouscategories

followingclassificationasofDecem-

tsin billions):2

mer-

nks

gs

93.2percent ofallbanksofdeposit

sheld95.3percentof alldeposits.The

ccountto$10,000inSeptember,1950,

llfully protectedaccountsininsured

nt.3

ccountinacommercialbankoffers

iquidity,convenience,andmodestin-

areenjoyed,asinterestonaccountsis

efulnessofthesavingsaccounttothe

oldingacashreserveand ofaccumulat-

mentinothertypesofmedia.

gsBanks

he529mutualsavingsbanksare

marilyin theNewEnglandandMiddle

ivepercentofthebanksarelocatedin

eBulletin.

eralDepositI nsuranceCorporation,1950,pp.4-9.


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39/261

,andConnecticut,andinthese three

ngsdepositsarelocated.Thereareonly

estand4onthe Pacificcoast(inWash-

nstitutionsappealespeciallytothe

samaximumofsafetyandwho isnotin

ninvestments.Asexplainedinalater

epermittedtoinvesttheirdeposits

ndother mediathatareapprovedby

tyindirect investinginstitutionsfor

nkorganizedin 1816;twoorganized

ting.TheBowerySavingsBank,which

wasorganizedinNewYorkCityin

bankscomprisedonly4percentof

tesattheendof 1950,theyheld36

vingsandtimedeposits.Thefollowing

owsthecombinedassetsandliabilities

sas ofDecember31,1950(inmillions

nks$796.9

ons10,867.8

s8,136.8

fits2,247.2

ttheratioof capitalfundstode-

ashand UnitedStatesGovernment

sitsby58percent.

tualsavingsbanksareorganized

netearningsaredistributedto de-

plusearningsoverandabovedividends

eCurreiK-y,AnnualReport,1950,p.162.


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40/261

account,whichbelongstothedepositors

ortheirprotection.Eachdepositorhasan

us,irrespectiveofthe periodofhis

ateunderthedirectionoftrusteesand

nkingauthorities.

deposits,andtheright isreserved

onof withdrawal,varyingfrom10days

tates(60daysin NewYorkState).

ed.Overtheirlonghistory,mutual

ainedanexcellentsafetyrecord.And

mutuals(includingthoseinNewYork)

eralDepositInsuranceCorporation,5

ncialstrength,insuranceofdeposits

stateregulationprovide,for practical

yandliquiditythatcanbe enjoyed

ksavingsaccounts.Similarly,fewmu-

e FederalReserveSystem.InNew

ever,subscribedtostockintwocentral

bothformedin1933theSavings

signedtoadvancefundstomemberson

ments,andtheInstitutionalSecurities

rchasemortgagesfrommemberbanks.

atcanbe acceptedfromoneperson

to$7,500(exclusiveofaccruedin-

$5,000inMassachusetts.Thislimita-

htbetermed"investment"accounts

full onshortnotice.Therateof in-

eswith changesineconomiccondi-

dsin1949and 1950causedmanybanks

percent,anda fewwerepaying2&

averagerateisabout2 percentarate

ommercialbanksavingsbutis lower

ingsand loanassociations.

,194 mutualbankswith$14.3billionsofdeposits

C,while335others,with$5.7 billionsofdeposits,were

veBulletin.

sbanksinMassachusettsarcinsuredbythe Mutual

nConnecticutbytheSavingsBanksDepositGuarantee

entofdepositsarecoveredbythe statefundsin


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41/261

elopments.Themutualsavingsbank

mallsavings,legal protection,modest

meansofaccumulatingareservefund.

ordtheseinstitutionshaveachieved,

acilitiesarenotavailableinmanymore

htheyarelocated.Althoughthesav-

mercialbanksprovidesubstantiallythe

cealowerrateofinterest.

gdevelopmentinthesavingsbank

feinsurancepoliciesbysavingsbanks

907),NewYork(since1938),and

Suchpolicieshavetheadvantagesof

ackofsalescommissionsanda lower

rinitialcash-surrendervalue.In1950

an500,000policiestotaling morethan

gsbanks,whichalsoconfinethem-

sdepositsbutareownedby stockholders

efit,areno longerimportant.InNew

mutualsavingsbanksare nowper-

LoanAssociations

avingsandloanassociations(also

associations,co-operativebanks,and

areinstitutionsthataredevotedalmost

onoffundsinsavers' accountsandthe

nurbanmortgageloans.With theex-

rteredinstitutions(notablyinCalifornia

andco-operativeorganizations.There

avingsandloanassociationswithcom-

f1950,ofnearly$17billions.They are

rdofall thehomeloanscurrentlv

rowers.Theold buildingandloan

nlybystates,wereorganizedprimarily

ativehome-financing.Sincetheearly

boutSavingMoney(AssociationofBetterBusiness

.


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42/261

ngs-depositoryfunctionhasgrownin

esavingsandloanassociationsareac-

ksandinsurancecompaniesforthe

Theirrapidgrowth isindicatedbythe

tpartofthis chapter.

onsoperateunderbothstateand

sociations(about4,500)arechartered

yoperateandaresupervisedbystate

5Federalassociations,whichinclude

tions,arecharteredunderlegislation

p theHomeLoanBankBoard.All

mutualintype,areexaminedandsuper-

nkBoard,andmusthave theirac-

eralSavingsandLoanInsuranceCor-

hestrict sense,savingsandloan

sitories.Saversplacingfundsinasso-

dbecomeownersofthe institution,

ksarelegallycreditorsandhavecred-

fdefault.7Depositorsinbanksreceive

insavingsandloanassociationsreceive

expensesandreserveshavebeenpro-

eprohibitedbylawandcustomfrom

nd"interest,"althoughFederalasso-

sociationsarepermittedtousethe term

remutualassociationhasnocapital

wnedbyshare-accountholdersandis

ctedbythem.Thedirectors,inturn,

m"shareaccount"usedbytheassocia-

racticeoftheearlierbuildingandloan

rowersforhome-buildingpurposessub-

whenpaidup,wouldbesufficientto

ountsarenowopenedwithborrowers

yOhioand California,state-charteredassociationsare

"guarantee"capitalstock,theownersofwhichown

on.Theholdersofcertificatesofdepositandsavings

itors.Federalassociationsaremutualinstitutionsand

embersor account-holders.


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43/261

ithinvestorsseekingincomeonthen-

ntsorcertificatesinunitsof$100

mentsandreceivedividendsbycheck.

permitinvestmentatregularorirregu-

mounts;dividendsareordinarilycredited

houghrecentregulationsgoverning

thesavertheoptionofhavingearnings

hisaccount.9Theregulationsgovern-

ermitthedirectorstoexemptallac-

earnings;anumberofassociationshave

rift,associationsmayadoptbonus

alrateof1 percentorlessis paid

,say,200timesanagreedmonthlypay-

bankdepositandanaccountin a

onisindicatedbydifferencesinpro-

esavingsandloanaccountisnot a

annotbewrittenagainstit. From75to

oftheassociationconsistofmortgage

homeswhichtheborrowerpaysbackin

nts.Thedegreeofliquidityprovidedr-

otto beexpectedunderthesecondi-

neffectarepreparedtomeetmodest

ofshares)ondemand;somerequire

drawals,exceptincasesofreal emer-

eetwithdrawals,theFederal-andmost

onsrequiretheholdersof shareaccounts

forwithdrawal.Theinstitutionmust

tof withdrawalrequestedwithinthirty

-thirdandinsomestatesas muchastwo-

e holdersofaccountsintheorderof

tinFederalassociationsapplyingfor

harterN"associations,whichhaveonlythesavings

ciationshavebothinvestmentaccountsandsavings

estmentaccountsarepaidincash,whileearningson

iteddirectly.


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44/261

thatamountandtheirapplicationsare

ttheendof thelist.Therightis also

ctorstorepurchasenotmorethan$200

monthwithoutregard tootherpro-

ssociationshavebeenmeetingre-

demandoronrelativelyshortnotice;

ntinueexceptinperiodsofsevere

shreserves,availabilityofrediscount

theHomeLoanBanks,andthe large

ecuritiesprovidesufficientliquidityfor

ver,thegenerallylessliquidcharacter

eoverlooked.

hedistinctionbetweeninsuredbanks

ciationswithrespecttothe wayinwhich

operateincaseofdefaulthasbeen

enaninsuredcommercialorsavings

demandsofitsdepositors,thelaw

DepositInsuranceCorporationshall

reddepositseither(1) bymaking

ratransferreddeposittoanotherin-

beavailable,or (2)insuchother

ectorsof theF.D.I.C. mayprescribe.

ondalternativehasbeenused,the

diatepaymentincash.AllFederal

onsandmorethan1,300stateassocia-

rance(up to$10,000peraccount)

ndLoanInsuranceCorporation,es-

ersuchassociationscarry80percent

oanresourcesofthecountry.Inthe

uredinstitution,the lawnowprovides

whentheaccountis surrenderedand

tion,makeavailabletohimassoon as

(2) atransferredaccountinanew

.L.I. C.hadassetsofapproximately

7percentconsistedofcashandUnited

tions.Itinsuredaccountsof2,860in-

ssetsof$13.7billions.Thesavingsin


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45/261

$11.4billions,ofwhich98 percent,

nsured.10

sandloanassociationprovidesa

majorpartof itsfundsareinvestedin

storcannotexpecttoreceivethehigher

nsasa resultoftheirearningson mort-

ratespaidon banksavingsaccounts)

meliquidity.In1950therates paidac-

onsrangedfrom2to4 percent,with

spaying2 and2%percent.

hefollowingcombinedstatementof

dloanassociationsandco-operative

sindicativeofthe characteroftheir

fordedaccount-holders.Generaland

e9percentofsavingsand investment

NTOFCONDITION

ASSOCIATIONSANDCO-OPERATIVEBANKS,

nitedStatesSavingsandLoanLeaguefromreportsof Home

esupervisoryauthorities.

nceAgency,FourthAnnualReport,Part2(Home

p.188.


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46/261

nmentbondswere17percentofac-

wingofindividualassociationsinthese

derange.Theinvestorwoulddowell

ntofhis localassociationandinquire

andmanagement.Ofspecialimpor-

portionofreservesand undivided

liquidityposition,and thequalityof

Federalassociationsarerequiredto

ndofsixmonthsat least5percentof

quiredbythe insuranceregulations

ntofinsured accounts),whicheveris

ankBoardisauthorizedtoestablish

etween4and8 percentofwithdrawable

rsoftheHomeLoanBankSystem.The

at6 percent.Aratioof 15percent

onablestandardforthelargerassocia-

theFederallawsdatingfrom1933,

dsupervisesFederalsavingsandloan

SavingsandLoanInsuranceCorpora-

anCorporation(nowinliquidation),

meLoanBanks.AllFederalassocia-

stockintheHomeLoanBanks;other

teassociationselectingmembership,

dinsurancecompanies.Theoriginal

ankswasprovidedbythe govern-

ssubscribedtostockintheamountof

ghomemortgageloans,purchasecon-

ons.In1950provisionwasmadefor

rnment-ownedstockbyincreasingthe

onstockholdingstotwopercentof

geassets.Thechiefsourceoffundsof

beentheissuanceof consolidatednotes

herewere$560,000,000outstandingat

omeLoanBanksis tomakeloans

mortgages,governmentbonds,orstock

ndrestrictionsoninvestmentsofsavingsand loan

dinChapter9.


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47/261

curity.Thecharterprovisionsof a

tittoborrowupto one-halfofitscapi-

earningscreditedthereto).Theamount

omsourcesotherthanaFederalHome

-tenthof suchcapital.However,with

LoanBankBoard,theassociation

mountfromitsHomeLoanBankor

uponsuchtermsasmaybe required

euse ofsuchborrowingpowerwould

nt-holdersofasavingsandloan asso-

scomparedtothesavings depositorin


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48/261

ND

NUED)

onds

dswerefirstissuedin 1935tofurnish

orthesavingsof individualsandtohelp

ngWorldWarII greatemphasiswas

onofthesebonds,andinthe post-War

beenconductedbytheTreasuryDe-

nterestofinvestorsin thesesecurities.

ofthismediumof savingisindicated

ingtheamountsoutstandingatthe

llionsof dollars):

ceduringthewar,theoutstanding

particularlySeriesEbonds,continued

ennewsalesand thecurrentaccrualof

tofallbehindredemptions.

ndsareissued inthreeseries:E,F,

bepurchasedonlybyindividuals,

vailabletobothindividualsandin-

rcialbanks.Thedistinctivefeaturesof

ollows:

n face-valuedenominationsof

0,and$1,000.Denominationsof$10

ofthearmedforcesonly.


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49/261

anystatedrateofinterest butare

arsandaresold at75percent offace

theholderofthebonddoes notcollect

isredeemed.The25-per-centprofit

duerepresentsinterestfor theperiod

nualrateof3/3per centsimpleinter-

poundedsemiannuallyfortheperiod.

BONDS(SERIESE)

comeYields


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50/261

mentpurposes,therateofyieldvolun-

nexpiredperiodof thebondswillbe

te.Asshownin theaccompanying

edattheendoffive years,theredemp-

ordayieldof1.79per centforthefive-

atethata yieldof4.01percent

alternativeinvestmenttoequalthat

tainablethroughholdingthesavings

,the ownerofamaturedSeriesE

ons:(1)to redeemthebond;(2)to

odnottoexceed10years,duringwhich

ate of2)spercentsimple interestfor

fyearsand thereafteratahigherrate

gregatereturnforthe 10-yearextension

pounded;1(3)to exchangetheEbond

ameoptionsweretoapplyto allout-

maturity,andtoallnewSeries Ebonds

tiablesecuritiesandare redeem-

owners,thus protectingtheholders

eft,forgery,fire,and similarcauses.

chasedonlybyindividualpersons

enamesof corporations,banks,trus-

ndsmayberegistered inthenameof

vidualsas co-owners(eitherofwhom

s ownerandbeneficiary.

seofthesebondspermittedtoany

tyvalue($7,500cost price)foreach

20,000if co-ownershipregistrationis

akecareofthe vastmajorityofin-

veraltimesthelimitcouldbe bought

chasedatbanks,atpostoffices,or

uryDepartmentatWashington.

esFbondsaresimilar toSeriesE

heappreciationtype,buttheymature

emptionvalueofextendedSeriesEbondsto$117..50

d$13-3.33attheend of10years.


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ssueandcost$74.00per$100 ofma-

turityresultsin ayield,ifheldfor

entcompoundedsemiannually.They

eattheoptionoftheholderonly after

f issue,ononemonth'swrittennotice.

duallyincreasetomaturity,and,like

ebondsareredeemedbeforematurity,

onvaluetomaturityishigherthanthe

werthroughoutthewholeperiodthan

ationsofSeries Fbondsrunashigh

beregisteredin thenameofassocia-

es,andcorporations,aswellasinthe

eptcommercialbanksacceptingdemand

alpurchaseis $100,000issueprice

).SeriesFbondsareavailableatthe

dfromtheTreasureroftheUnited

e12 yearsfromdateofissue,but,

thesebonds arenotsoldat adiscount

othe registeredownerattherateof

ablein denominationsoffrom$100

and redeemedatfacevalue.Their

andpurchasefeaturesarethesameas

ds,exceptthattheredemptionvalue

100atthe endofthefirst sixmonths

eyears.Thereafterthevaluerisesto

eyaretheonly oneofthethreeseries

easttheoriginalpurchasepriceupon

c.Insomerespectssavingsbonds,

ds,areoutstandinginvestmentbar-

anyinvestmentcanbe.Theydonot

uctuations.Theyarecompletelyliquid

nvalueisknownatall times.Ifheld

ttractiveinrelationtocorporatebonds,

compensatefortheadditionalrisk

rchase,easeofregistrationandreplace-

eneficiaryprovisionsaremostattrac-


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52/261

esE andFbondsdonot provide

ynotseriousin mostcases,asthesav-

are usuallynotexpectedtoproduce

ncomeisdesiredaftera fewyears,a

scanbe cashedwithoutdisturbing

pecificdisadvantages:(1)theyare

ynotbe usedascollateral;(2)ifre-

ears,theiryieldis lowerthanthat

positsalthoughhigherthantheyield

Treasurysecurities,andtheyieldto

paid bysomesavingsandloanasso-

have,ofcourse,thesamedisadvantage

ncipalandfixed-incomeinvestments

ely,thattheirrealvaluedeclineswith

Theawarenessofthisfactor,together

easedrateselsewhere,haslessened

sincetheoutbreakoftheKoreancrisis.

yanyincometax preference.How-

E andFbondsmaybereportedfor

wowayseachyearasitaccrues,orat

erestis received.Thelattermethodis

ingitthe investormayfindthatthe

taxedhasincreasedduringthelifeof

axesontheentireinterest atthis

itiesasInvestments

ieshavelongprovidedthemost

nthe country.Theirassetsareinex-

policyreservesapproximate$55billions,

xceeds$11billions,ofwhichthree-

miumpaymentsofpolicyholders.

ustryaregiven inChapter10.)

flifeinsurance.Lifeinsuranceenters

natleast threemajorrespects:(1)in-

feasiblemethodbywhichmostin-

equateestatefordependents;(2)in

PublicDomain,

Google-d

igitized

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_use#pd-g

oogle


53/261

thereisasubstantialinvestmentelement

ervethatrepresentssavingsandthat is

h valuesorpolicyloansincaseof

dmaycreateanestateforhimselfafter

ependentshasdeclinedor disap-

ussionoftheprinciplesofinsuranceand

ieswould beoutofplacein thisvol-

mmarymayproveuseful.Discussionof

ndustrialinsuranceandmanyspecial

somitted.

anceisusually alevelpremium,

yeareventhoughtherisk ofdeath

ed atthetimethe policyisissuedand

nsured.It consistsofthreeelements:

rdthecompany'soperatingexpenses

m"or"load";(2) anamountnecessary

ecompanyforcarryingtheriskof pre-

d;(3) anamountsetasideasa reserve

eed"rateso astocoverfuturedeath

age.Disregardingthefirst item,itis

miumgoesforcurrentprotectionand

or investmentelement.Itisthere-

entthatconstitutesthecashvaluethat

statedperiod,possiblythefirsttwoor

cellationofthecontractorinthe form

emayalso beusedtoextendtheterm

chaseapaid-uppolicyforareduced

nsuredwishesto stoppayingpremiums

onthebasisof: (1)theprobability

icatedbyamortalitytable;(2) an

oninvestedreserves(nowas lowas2

cies);(3)expectedsellingexpense,

softhecompany;and(4)thetype of

hefirstthree ofthese,thecostelements,

the caseofmutualcompanies(and

ockcompanies)suchsavingsmaybe

erinthe formof"dividends."Orthe

the companyatinterest,beusedto

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54/261

m,orbeusedto purchaseadditional

videndis,ofcourse,nota trueprofitbut

remiumpaid.

goingdownformanyyears inthis

havebeendecliningandcompany

cientlytomorethanoffsetthemortality

creaseinsurancepremiums.

nvestor'spointof view.Incom-

policiesissuedbydifferentcompanies,

rethattheirprovisionsandbenefitsare

onsiderationthenet costoveraperiod

lessany dividends.Anotherandper-

fdeterminingthecomparativenetcost

emiumspaidin,lessdividends,less

attheendofa givenperiod.Thiscost

gativeamount.Itisimportanttoremem-

paidinregularamountsandare not

ecompany'sexperience.

iumsatage35for varioustypesof

endervaluesattheend of20yearswere

ecompanyin1949:

20Years

0

21,000

stofprotectionforeach$1,000of

meforeachageofissue,the difference

uspolicies(at thesameage)depends

tinthepolicy.This investmentelement

dingtothetypeofpolicypurchased.

orthepaymentof facevalueonlyif

pulatedperiodinvery muchthesame

olicyprotectspropertyforacertain

yvalueattheendofthe term.Since

l,itisnotnecessaryforthe insurance

fundforthatpurpose.Longer-term

years,have aslightcashvalue,but

nddeclinesto zeroattheexpiration

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55/261

stordesiringthegreatesttemporary

ay,theterm policyisthebestchoice.

eduleofrates,an annualpremiumof

100ofprotectionfor20 yearsthrougha

00inordinarylifeprotection,$2,860in

nce,andonly$2,100in20-yearendow-

rm insuranceinclude:(1)theele-

tionperdollarofpremiumoutlaythat

epossibilityofinvestingthedifference

erminsuranceandahigher-premium

wouldbeearnedbythe insurance

tyofconvertingintoapermanentform

calexaminationwithinacertainperiod

onofthe termpolicyifpermanentpro-

se ofthetermpolicyto insurethe

e borrowerdiesbeforethedebtma-

suranceare:(1)theinabilityof

maticallyunlesscompelledtosavein

orce;(2) thelackofareservethat

n emergenciesandthatwouldkeep

suredwereunabletomeethis pre-

aldifficulties;(3)thehighcostor even

theexpirationofthe period;(4)the

tofailure toconvertandhencetoex-

Perhapsthebestplan fortheyoung

tibleterminsurancetothefullamount

changeto permanentinsuranceassoon

Tooffsetthepracticaldifficultiesthat

ilyIncomepolicyisrecommended.

arylifewithdecreasingterminsurance

eupontheprematuredeathof thein-

fa specifieddate(say,10or20 years

thefaceof thepolicyonthatdate.The

hatgreaterthanthatforterm insurance

olelifeinsurance.

s(oftencalledstraightlifepolicies)

uirepremiumsuntiltheinsureddies.


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56/261

allydeadatage96or 100depending

andhispolicymaturesand ispaid

fthisformare: (1)theinsuredis never

savingsorinvestmentelementissub-

rwhen theinsurednolongerhas

emaybetakenin cashormaybeused

teragei tbecomesdifficulttocontinue

pvaluesmaybeusedto extendthein-

yareducedamountofprotection.The

themaximumamountoftemporary

eestablishmentofafamilybya younger

cies,premiumsarepaidata higher

0or30 years),afterwhichthepolicy

thoutfurtherpayments.Thepolicy

dofthe20 or30years,butthe insurance

gesofthisformare:(1) premiumpay-

eperiod whenthepolicyholderismost

notbecomea burdenonretirementin-

substantialinvestmentelementinthe

othe rlecessityofaccumulatingre-

sthatwill protectagainstdeathloss

ntsarenolongerrequired.The major

suredhassubstantiallyless protection

s affordedbytermorwhole-lifein-

whentheprotectionmaybe most

epossibleoveremphasisonsavings

otection).

protectionforaspecifiedperiodof

attheendof whichthepolicymatures

yis paidtotheinsuredhimself.Such

ysmallprotectionwitharelatively

.Inanon-technicalsense,theendow-

ncreasingsavingsfundprotectedby

e.Iftheinsureddiesduringthe period,

uredarepaid thefaceamount;ifhe

Advantagesofendowmentinsurance

protectionissmallandwherethe

inant,theinsuredis forcedtosavein


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57/261

force;(2)thegoalswhosefulfillment

cemaybemetwhetherthe insured

ubstantialcashvalueprovidesacash

intoretirementprotection.Themain

esare:(1)protectionexpireswhenthe

tectionisaffordedperdollar ofpre-

surancepoliciesoffer,invariousde-

binationofprotectionandinvestment.

elthatthetwoshouldnotbe combined

return onthatpartof thepremium

tmentcommitmentisbelowthatwhich

efromthedirectpurchaseof sound

n bankinterest.However,thelower

he insurancecompanyiscompounded

linvestorrarelymanagestoaccomplish.

mpoundedistax-free.Thecompulsory

encouragementtosystematicthrift,the

fromthe cautionandskillanddegree

chthelargeinsurancecompaniesmake

liquidity,convenience,andfreedom

hepartof theinsuredarestrongargu-

stmentvaluesinlifeinsurancecontracts,

investors.

Theannuityisaform ofinvestment

ximumreturnwithsafetyator prior

tractprovidesforthereceiptof a

llmentsimmediatelyorafteran agreed

eannuitantlives,inreturnfor alump-

nualpaymentsbeforeretirementon

er.Thebasisofcalculationistheage

ertheannuitantlives incomparison

ehereceivesin excessofwhathehas

hort-lived,hereceivesbackmuchless

fe annuityissimplyameansof making

apitalwillprovideaspecifiedincome

Sinceapartofthe principal,inaddi-

d,isreturnedeachyear,thereturnto

thatwhichwouldbeproducedby


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58/261

undalone.Thecostof thishigherin-

dationofprincipalatthe deathofthe

traightlifeannuitydescribedbelow.

ofannuitiescanbe describedvery

annuityispurchasedbythepayment

entsto beginatonceforthe lifeofthe

ymentannuitiescallforpremiumsperi-

arsto thedateofretirement,after

vesanincomeforlife.Alife insurance

eproceedsofa lifeinsurancepolicy

annuityin lieuofalump sum.Most

videforthistypeof settlementoption.

timeof receiptofbenefits,annuities

iate,whichpayagivensum periodically

ordeferred,inwhichincomedoesnot

hefuture,usuallyattheestimatedend

producingperiod.Possiblythemost

theinstallment-paymenttypewhose

tilthe retirementageofthepolicy-

vorshipannuitiespayanincometo

ashusbandor wife,aslongaseither

desincometothe annuitantforhis

longthatmaybe.When deathoccurs,

sadvantageofsuchanarrangementis

the annuitantmayhavereceivedonly

paidintothe company.Theannui-

hisheirs,mayfail toappreciatethat

eincomethatwouldhave beenre-

r thantheaverage.Consequently,

arenot socommontodayasannuities

hed,suchasthelifeannuitycertain,

febut guaranteestomakeaminimum

hasfor10or 20years,irrespectiveof

nuitant.Aninstallmentrefundlife

rlifebut providesforacontinuation

ariesuntilthepaymentstotalthe origi-

nuitantdiebeforethat time.Acash

r butprovidesforthepaymentincash


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59/261

al principal.Suchannuitiesoftencon-

es.Theadvantageoftherefundtypeis

vailableto takecareofdependents

itantshoulddiebeforethedependents

ence.

e incomereceivedfromthem,of

andlife expectancyoftheannuitant,

urancecompany,andtheformofthe

showtheamountofa monthlystraight

chasedwithan immediatelump-sum

onratesquotedin 1949,assumingan

nt.

nuityincreaseswiththeage atthe

he returnismuchhigher(2 timesat

65for awoman)thancouldbeobtained

3 percent.Thisisbecausethereturn

ndinterest.

ageofsafety,convenience,freedom

ntosave.Andmostimportantofall,

attheannuitantwill notoutlivehis

flimitedmeans,adefiniteincomefor

hemanof wealth,thepurchaseof

edincome(usingpart ofcapital)and

hetotalfundfreefor investmentin

ts.Annuitiessuffer,asdoall fixed-income

ofreducedpurchasingpowerinthe

dpremiumrateshavebeenincreasing

espreadrecognitionoftheiradvan-

ct thatatthebeginningof 1951,3,650,-

vidual,andcontractssupplementary


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60/261

S

ereinforcewith legalreservecom-

000,000immediateanddeferredincome.2

nefitsandthegrowingnumberofpen-

edesireforthe financialsecuritypro-

f arrangement.

e,LifeInsuranceFactBook,1951,p.29.


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61/261

RPORATE

chapteris todiscussthecharacter-

omtheviewpointofthe investor.

dotherissuersaredescribedin later

ussionis:(1) generalcharacteristics,

portanceofbondfinancing,(4)bond

strument,(6)classificationofbonds

lassificationastopurpose,(8)classi-

) classificationbyredemptionand

ssificationbymannerofparticipation

tpositionofbonds.Theclassifications

yexclusive,anda singlebondissue

ourgroupings.

ondsrepresentlong-termcorporate

ocks,whichrepresentownership.Bond-

torsoftheissuing corporation.Claims

orityoverthe stockholders'interests,

mayenjoypreferredclaims,butonly

erenceis definitelystatedinthein-

afirstmortgageissue.Bondsusually

fixedrateofinterest,andtheir principal

efinitedate.Thebondholderisentitled

ncipalbut tonomore.

oldernovoicein management,ex-

ureon thepartofthe debtortomeet

ond indenturegivesthebondholder,

dinthe indenture,therighttotakelegal

eonanypledgedpropertyortosue for

deris thereforeinsharpcontrast


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RPORATEBONDS

rorowner.The bondholdertakes

kthanthe stockholder,inthesame

aloan,heexpectsa fixedrateofincome,

urn ofhiscapitalata definitefuture

ityofhisbonddependson thedegree

expectedtofulfilthesepromises.

Whengovernmentsareunableto

currenttaxincome,theyhavenochoice

ssuanceof bondsorotherdebtin-

ontheotherhand,haveawiderchoice

nancetheiroperations.Amongother

ty-typesecurities(withinthelimits

marketconditions).Whydotheyincur

mainreasonsexplain theuseofbonds:

ds.Investorsareusuallysatisfied

nds thanfrompreferredorcommon

heaperfinancingis,however,accom-

thepartofthecorporation.

Usingborrowedfundsatacostlower

expectstoearn ontheiruseincreases

e equityorowners'investment.Un-

ateonbondsisa fixedcharge,trading

todeficitswhenearningsdecline.

funds.Fundscanbeattractedfrom

nvestinginstitutionsthatareunwilling

k.

cebondsordinarilycarrynovoting

oes notdisturbthevotingpowerof

long asthebondsarenot indefault.

eintereston bondsisdeductiblein

efortaxpurposes,whereasdividends

eadvantages,therearedefinitelimi-

hewisecorporatemanagementfeels

eselimitationsaredisregarded,the

bondssuffers,andthecorporationmay

es.In thelatersectionsofthis book

entothe testsofsoundfinancialpolicy.


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RPORATEBONDS53

ing.Theaccompanyingtableshows

rationshavereliedonbonds during

interestingtonotethatbondscom-

ofthetotalcorporationsecuritiesissued

benoted,however,thatequitycapi-

owedcapital,alsoincludesreinvested

sdo notrevealthewholepictureof

ationshavereliedondebt asagainst

ng.

TYISSUESINTHEUNITEDSTATES


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ORPORATERONDS

iesregisteredundertheSecuritiesAct

ualificationsofthetrusteeandoutlines

etrustee'sactionsthatmustbeincluded

bondcertificateitselfcontainsonly

visionsof theborrowing.Itisin effect

te.Itstitleusually indicatesthename

terest,thedateof maturity,andsome

the security,ifany.Thefaceamount

y$1,000andrepresentspart ofalarge

into smallunitsforconveniencein

linterestrateis statedoneachbond,

beingmadesemiannually.Interestis

oughthedepositofcouponsdetached

kfromtheissuer.Practicallyallbonds

es;asmallgroup,however,areperma-

aresecuredobligations,butmany

eculiarlyenough,someofthehighest-

llyspeaking,unsecuredbonds.

entiallysimilaras representations

riationsarefoundinpractice.Thechief

sisinthenatureof theclaimthatthe

eissuer.Thatbondwhichhas aprior

sthesafersecurity,takingprecedence

dby thesamedebtor.Thetitleof the

atesthedegreeofpriority,isusually

e instrument,suchasfirstmortgage,

rfromthepurposeofi ssue,suchas

consolidated;orfromsomespecial

nd,convertible,orexternal.Innu-

tiontitleisused,suchas firstconsoli-

e,orfirstandrefunding.Thetitle,

uishtheissuemorethanto reflectthe

llfirstmortgagesareso infact,and,

ed,first-mortgagebondsmayprovein-

issues.

estor,onecompany,especiallyif

everalissuesoutstanding,withthe

mmostcomplicated.Moreover,one


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RPORATEBONDS55

bondsofitsownmaybedirectlyor

hepaymentofbondsissuedby affiliated

ntralRailroadhadoutstandingin1950

nadditiontoits equipmentobligations.

s intoadefinitesequenceofclaim

ompaniesusuallyhaverelativelyfew

correspondinglysimplernature

.Themostpopulardesignationof

sbaseduponthe natureofthesecurity

nferenceisplausiblethat,in many

baseduponanotherconsideration,the

termthatwouldindicateaweakunder-

ssuesthatrepresentlittlebetterthan

armlesstitlessuchasgold5's orsinking

f theBostonandMaineRailroadcon-

orporatefranknessinthis interesting

derordinaryconditionswheredefinite

s selectedthatpatentlycarriesthis

suchasfirst mortgage3s,refunding

3%'s.

ostcommonformofsecuredissues.

dbya lienonspecificpropertyde-

ndthe protectionaffordedbythemort-

tyof thelienandthe valueofthe

ybetheentirefixed propertyoronly

nthecaseofrailroaddivisional bonds.

uaintedwithcertainfeaturesinthe

hinderhis interests.Ifthemortgage

aybe securedbythesamelien.How-

oundthatsuchissuesmakefuturefinanc-

mortgageisdesignedtomeetthis

ortgage,morebondssecuredbythe

ut certainprotectiveprovisionsare

tionof theoriginalsecurity:(1)that

inproportion(often75 percent)to

2)thatadditionalbondsbe issued

estchargesonnewandold areade-

e).Theeffectsofexpansionofdebt

es)arealsolimitedif theopen-end


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ORPORATEBONDS

er-acquired-propertyclausewhichpro-

einafteracquired"isincludedin the

nvestorsshouldseekis thepenalty

e variouscovenantsintheindenture,

efaultin anyspecifiedpromiserenders

iatelydueandpayable.

videdintoseniorand juniorliens,

priorityofclaimrather thantodateof

chholdthe firstclaimuponbothearn-

firstmortgagesandprior liens.Asthe

gebondshaveprecedenceofclaim

ies.TheDuquesneLight(Pittsburgh)

ratesuchanissue.At timesthesenior

,illustrated intheMissouri-Kansas-

chareseniorissues ofthecompany

propertybutwhichconstituteasecond

system.Mortgagesgiveninpayment

estyledpurchasemoneymortgages

urchaseMoney4'sof 1952)andtake

gainstthepropertyacquired,despite

mortgagespreviouslyissuedbythe

eseniorgroupalsoincludesagoodnum-

ues,whichare,in manycases,acom-

claimandasmalljuniorposition,or

tofprior bonds,orwhichhavegradu-

theretirementof earlierclaims.The

nsolidatedMortgagebondsarejunior

Hens.

that haveasecondaryclaimupon

omtheviewpointoftheinvestor,it

erybond boreanumericaladjective

esecurity,asshownin thecaseofthe

heast&St.LouisDivisionSecond

orporations,however,arereluctantto

ositionofjunior issues;theypreferless

ses,misleadingtitles,suchasgeneral,

,orfirstrefunding.All refundingmort-

s,areoriginally,at least,juniorclaims,


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RPORATEBONDS57

s reservedtoretiretheexistingfirst

beforestated,therefundingmortgage

but,practicallyspeaking,fewsuchin-

sideof thepublicutilityfield.The

efunding5'sofwhichover$224,000,-

950,weresubordinatein claimtoonly

sthat thenremainedunpaid.

bythedepositof otherbondsand

edcollateraltrustbonds.Justas inthe

ntheeventof defaultthecollateralcan

st frequentusersofthistypeof bond

panieswhichhaveastheir mainassets

nies.Industrialandpublicservicecom-

ollateralbondswhenalloftheir fixed

ymayissue bondssecuredbyboth

ofsecurities.

roughlythethreefactorsthatde-

andingofcollateraltrustbonds:(1)the

uritiespledged;(2) thegeneralcredit

pecificprotectiveprovisionsofthe

eanamplespreadbetweenthevalue of

untofthe debt,andtheissuershould

s differential.Especiallyifthevalue

,the investormayhavetorelychiefly

werofthe company,for,likemortgage

ityisworthless,thebonds becomein

gwithunsecureddebt.Anyclausein

substitutionofcollateralshouldbe

einvestorshouldbeparticularlywary

atare securedbycommonstocksof

eshavebondsandpreferredstockout-

ditionsthecollateraltrustbondsarein

nsistsofthosesecuredbythepromise

rthantheissuer,andincludesguaran-

onds.Theguaranteemaybedirect,

estandprincipal,orit mayarisethrough

helesseeagreestopay tothelessor

einterest onthebonds.Assumedbonds

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ORPORATERONDS

hathasbeenacquiredbyanotherby

asa resultofthereorganizationofthe

erthe propertyoftheoriginalissuer,

beenassumedbythesuccessorcom-

rect jointobligationoftwoormore

bligationsofacompanythatoperates

hasa terminal,andwhosebondsare

sers.

djointbondsdependfortheirinvest-

pertyand earningsoftheoriginal

ftheadditionalpromisetopayof the

rconcern.Ifbothofthesetwoelements

ill commandhighinvestmentrespect.

ndinthe railwayfield,wheretheissues

havelongsinceceasedto operatetheir

guaranteedorassumedbya large

simportanttothe system,suchissues

of thesystem.

ndshavebeendiscussedunderthe

itis importanttonotethattheymay

orunsecuredbonds.Thefactorthat

tisthe additionofthecreditofa second

severalothercorporations,asinthe

erminalCompanyFirstMortgage

en ontheterminalpropertyandin

erallyguaranteedbysevenrailroad

mprisesthe debentureissues,which

ranyspecificassetsbut rankwiththe

All obligationsoftheUnitedStates

tates,andmostmunicipalbondsbe-

ughtheterm debentureisreserved

sues.Acommonprovisioninthein-

turebondsprovidesthat,ifthe com-

tgagedebt,thedebentureswill be

debentureissuemaymoveupinto the

bedesignatedbythe originaltitle.

ycompanieswithcreditstandingrang-

eak.ThedebentureissuesoftheAmeri-

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RPORATEBONDS59

aphCompanycarryanAarating.The

rationbondsaredebentures.Thefact

doesnotweakentheirinvestmentstatus

ermdebtoftheissuerand ifthegeneral

ofthe issuerprovideampleprotection.

nstrength ofanybondissue,secured

arningpoweroftheborrower.Butbe-

pecificlienonassets,theirposition may

ualorpriordebtis issued,oriftheir

,andworkingcapitalinparticular,is

developments.Itis importantthatthe

heprotectiveprovisionsinthedeben-

protecttheirstatus.Commonprovisions

erageclausementionedabove,pro-

enturesequallywithanynew mortgage

thepaymentofdividendsthat would

certainfigure,(3) requirementofthe

ratio ofcurrentassetstocurrentlia-

aybepaid,(4) limitationofthetotal

debentures,toacertainproportionof

apitalstock,or,morefrequently,toan

estis earnedacertainnumberoftimes.

ludeasinkingfundtoprovidefor

ountoutstandingand,togive them

tenmadeconvertibleintocommon

frequentlybyindustrialcorporations

byrailroadsandpublic utilities,which

gebonds.Exceptinunusualcases,the

dis precededbylayersofsecured

iorsecurityofsecondaryquality.

bemadeof arare(inAmerican

alleddebenturestock.Onlyinspection

illrevealwhetherthishybrid-named

bondora preferredstock.

ofissue.The purposeforwhichthe

rmsasecondbasis fortheselectionof

onmaybe totakeadvantageofa

tudetowardcertainclassesofsecurities,


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ORPORATEBONDS

fequipmenttrustnotes;orto avoid

enthroughtheuseof atitlesuchas

smethodofstylingbondsis,however,

respectiveofthemotive.Investors

estedinthe usetowhichtheirfunds

animportanttestofsafety.

edinthereorganizationof companies

racticallyallcases,theyarereceived

oroldsecuritiesretired inthenewplan,

yinterestispayableonlyifearnings

typeof incomebond(seebelow).

usuallyissuedundercloudedconditions,

ecompany,asshowninthe caseofthe

aFeRailwayAdjustmentMortgage4's

mayplacethebondsinthe investment

tIncome5'softheHudsonandMan-

vefared lessauspiciously.Adjustment

edbyajunior mortgage.Foreclosureis

faultinthepaymentof principaland

f ithasbeenearned.

financethe constructionofbridges.

horitiesforthe constructionofbridges

ngtonMemorialBridgebetweenNew

hcostmorethan$50,000,000)are

venuesofthebridge and,inrarein-

owerofthepublicauthorities.Bonds

ructionofrailroadbridges(suchas the

k) arechieflythemortgageobliga-

ingcompany(theNewYorkConnect-

aranteedbytheroadsusingthebridge

NewHaven).Suchbondsarelikewise

uedbyprivatecorporationsforthe

etollbridges,however,aregenerally

argelybecauseoftheirpoorrecordover

examplesofunfavorableexperience

ecompaniesareaffordedin thecases

(Detroit-Windsor)andtheSan

crossSanFranciscoBay.


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RPORATEBONDS61

ondsarethoseissuedforthepurpose

sueseveralseparatebondissues.They

refundingoperationsandofteninvolve

artandsecondorothermortgagesupon

y'sproperty.

ymortgagebondssecuredbyafirst

nofthesystem.Sincetheyprecede

eswithrespecttoa claimonacertain

sifiedasunderlyingbonds.

nsintheformof certificatesare

aseofequipmentnotablyrailway

paymentplan.Fundsforthe payment

inedbypayingan advancerentalor

o25 percentandsecuringthebalance

obligationspayableoveraperiodof

48,theWheelingandLakeErie Railway

havalueof$2,000,000.Thepurchase

shpaymentof$400,000(20%)and

%%equipmenttrust certificatesmatur-

semiannuallyfor10years.In1950

panypurchased19Diesel-electricfreight

s,598steelflatcars,31sleepingcars,

totalcostof$18,000,000;thepur-

ghacashpaymentof$4,500,000(25%)

0in 2&%trustcertificatespayableatthe

for15years.

edalmostuniversally,knownasthe

pmentisleasedtothe roadforthe

trustee,theinstallmentpaymentsare

vestorsreceive"dividends"ontheir

es.Thecertificatesrepresentabeneficial

eusuallyguaranteedastoprincipal

.The trusteeleasestheequipmentto

entalsufficienttopaytheexpensesof

certificates,andthe principalofthe

eserially.Therailroadalsoagreesto

goodorder.Thelease expiresafter

enpaid,andat thattimetitleto the


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ORPORATEBONDS

otherailroad.In theeventofdefault,

essionofthe equipmentandsellitfor

e-holders.

ownastheNewYorkplan,the

omthetrusteeundera conditionalbill

diatelyrevertstothe trusteeinthe

vestorsreceive"interest"ontheir

nsareusuallyregardedasexcellent

yields,owingto:(1)the essentialna-

he qualityofmobilitythatwould

dreadysale;(3)thegradualincrease

uetothe liquidationofthedebtona

ciationoftheequipment,whichnor-

eenyears;(4)the factthatreceivers

ompaniesin insolvencyusuallycontinue

equipmentobligationseventhough

gebondsofthe companytoremain

ellentinvestmentrecordofthesese-

e factthatinonlyonerecentinstance,

astRailway,wastheleasedisaffirmed

936).In thiscasepaymentstotalling

cateweredistributed.Inthreeother

tieswereextendedandtwo roadsex-

forotherobligationsbearingalower

theobligationsofacompanybeing

quity.With propercourtapproval,

erobligations,althoughtechnically

y lien.Theyareissuedasa meansof

dtheworkingcapitalpositionofthe

areorganization.Receivershipinequity

organizationunderbankruptcypro-

rtificatesarethemodernequivalentof

cates.

eissuedforthe moreobviouspurpose

favorablebasis.Justastheconversion

long-termdebtisknownasa "funding"

debtator beforematuritywiththe


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RPORATERONDS63

called"refunding."Themainreasonfor

istosaveon interestchargeswhen

rthe creditoftheissuerhas improved.

esplacewhenthecompanyhasmade

n.Theinvestormustexaminea"refund-

etherornot theuseofthatnameis for

secondmortgage.

forthe purposeoffinancingthecon-

iesinlargecities tobeusedbyone

es.Thesecompanies,eitherseparately

(jointly),usuallyassumeproportionate

ofthe terminalcompany,eitherby

antee.Thecompanieswhichpro-

ebondsoftheTerminalRailroadAsso-

severalofthe mostimportantsystems

ngobservationinconnectionwith

paniesindefaulton theirmortgage

edbythecourts tomaketheirpro-

erminalcontractsinordertoretainthe

sue.Bondsare issuedineither

.Some,butnotall,are interchange-

e.Couponbondsarepayabletobearer

restcoupons.Registeredbondsare

redowner,towhominterest checks

aseof bondsregisteredastoprincipal

ingmorenegotiabletothebearer,

ytransferredandhenceoftencommands

thatoftheregisteredbond.

rycertificatesissuedpendingthe

vebonds.Somemonthsarerequired

ving,andprintingofthe regularbonds.

imcertificateevidenc

investments (2)

Documents