SECURITIES OF CORPORATIONS 1. Assets versus investments.—It has been said often that, in American corporation finance, bonds represent fixed and tangible assets, preferred stock represents current assets, and common stock repre sents intangible values, excess earning power and hopes for the future. Real estate and buildings may be represented perhaps up to 80 per cent by bonds. Short-term notes, preferred stock, commercial paper and trade credits represent working capital and money to complete fixed assets to the point where they may be borrowed upon. The margin of prop erty which protects the whole, and the earning power over and above average yields, may be represented by common stock.
2. Bonds.—A bond may be described as a formal written obligation, given under seal and bearing in terest. Bonds are issued in a series and they obligate the issuing corporation to a repayment of principal after the lapse of the term for which they run. A bond is an obligation to repay a loan to a creditor, whereas a share of stock is the evidence of ownership of an undivided interest in the assets and profits of a business. The essence of the difference is that the bondholder is a creditor and, in consideration of ac cepting a low rate of interest, is excused from the risks and responsibilities incident to ownership. On the other hand, the stockholder is a part owner risk ing his capital on his managerial ability in the hope of gaining larger returns in the form of profits from the business. The true test of a bond, then, is this : Is it so safeguarded and restricted as to the propor tion of capital involved and as to the percentage of net income required for fixed charges that, so far as reasonable calculation can estimate, the hazards of business cannot reach it and disturb its return or de stroy its security? When this test fails, securities which are called bonds are such technically or in law only, but from the viewpoint of the investor they are not to be classed as bonds.
3. usual denominations of bonds are $100, $500 and $1,000. Recently there has been much agitation in favor of $100 bonds, or so called "Baby Bonds." It is urged in favor of bonds of this denomination that they promote thrift by put ting within the reach of small investors securities which have a higher yield than savings banks deposits, that they will lessen the attractions of get-rich-quick schemes and, finally, that they will "lead to a greater community of interest between the people and capital, prove the best security against demagoguery and as sault from self-seeking or sensational propagandists, an incentive to industrial peace and a powerful leaven for the enforcement of a square deal." The
argument against such bonds is that they are inducing people to draw their funds out of savings banks, and to invest on their own responsibility, without regard for the limits and precautions under which the savings banks invest. Since the small investor is unaccus tomed to handling his funds in this way, he may make errors which will be very costly to him. It is pointed out, further, that the smaller an investor's capital the larger should be the proportion held as a reserve, available on short notice. To accommodate such in vestors the savings bank is the ideal institution. An investment in bonds might easily prove not to be sufficiently accessible for investors of the smaller class. Furthermore, the principle of selecting bonds largely on the basis of their denomination, rather than their security and marketability, is a very poor one.
Some bonds which can be had in $100 denomina tions (the prices and yields being as of May 27, 1916) are as follows: 4. bonds are provided with interest coupons so that they may be transferred by simple delivery and the coupons be paid to bearer. A bond may, however, be registered as to the prin cipal. In that case it can change hands legally only by the owner's assigning his bond to the purchaser and by an exchange of the old bond for a new one at the offices of the corporation. At the same time there is a change in the registry on the company's books. Such a bond will have coupons. A bond which is registered as to both principal and interest has no coupons, but the issuing corporation remits the in terest by check to the registered owner.