5. Price and price of a gilt-edged bond depends in part upon when it is to be paid off, and in part upon the rate of interest in comparison with the rate ruling in the market. Of two 6 per cent bonds which are equally secure, one maturing in two years and the other in fifteen years, the latter will com mand the higher price. Disregarding this element it need hardly be insisted upon that with equal secur ity a 6 per cent bond will be more valuable than a 5 per cent bond. If the ruling rate in the market is 5 per cent, a 6 per cent bond will bring a premium, while a 4 per cent bond will sell below par. The price fluctuation of bonds, from phase to phase of the trade cycle, will be governed by the ease or tightness of the money market. The controlling consideration in the general trend of prices over long periods and from cycle to cycle, will be the changes which take place in the purchasing power of money.
Bonds which involve an appreciable element of hazard will have their prices fixed as indicated above, except that the price will be lowered as the risk in creases.
The yield of the bonds, preferred stocks and com mon stocks of ten companies, as of August 1, 1916, was as follows: For assuming the hazards of the business with rat ing rights and the possibilities of large earnings in the future, the stockholders in these corporations re ceive a current income barely one per cent more than that of the bondholders on their investment, if "rights" are left out of consideration.
6. bond may be unsecured, and so merit the name of debenture rather than of bond. If it is secured the property pledged may be real es tate, buildings and equipment; or it may be collateral composed of the bonds, notes, commercial paper or stocks of other corporations. Since a bond is a fixed liability, it should be secured by a pledge of fixed assets only. Secured obligations are attached to a property by a mortgage or trust deed. A mort gage is a conveyance of property to an individual creditor with a proviso that upon payment of the debt the conveyance shall be void. A trust deed is a provisional conveyance to a trustee in the interest of a group of creditors. There may be several mort gages on the same property, as first, second and third, or prior lien and junior lien. The various properties of a corporation such as a railroad may be mortgaged separately so. that there may exist divisional, exten sion, bridge, terminal and other bonds. Overlying or blanket mortgages may then be flung over these various subsidiary units so that general mortgage bonds and first consolidated mortgage bonds may be created. Bonds may be put out to replace previous issues. They are known as first refunding mortgage bonds or refunding first mortgage bonds. It is im portant to notice how the adjectives in these titles are grouped with reference to each other and with refer ence to the nouns. A refunding first mortgage bond is a first mortgage refunded, but a first refunding mortgage bond is a product of the first process the company has gone thru of refunding a bond secured by a mortgage. Accordingly, it may be far from a
first mortgage. It has been estimated, says Mr. Lownhaupt, that 95 per cent in number and value of steam railroad "firsts" are first liens in name only.
7. Blanket and effort is being made by railways and consolidated industrial corporations to simplify their structure of bond issues so that the managements will not be hampered in deal ing with the properties and earnings of subsidiary units by the restrictions of a mass of special mort gages and trust deeds. This effort takes the form of drawing comprehensive mortgages for large amounts and reserving a portion of the bonds to re tire underlying issues attached to portions of the prop erty as fast as they mature. Still other bonds of the same issue are placed in escrow to finance the con struction of additions. In time, as the older and smaller and closed issues are paid off or exchanged, such a general obligation will settle down evenly upon all parts of the property, and become a uni form and comprehensive first mortgage.
8. Collateral trust security of collat eral trust bonds is a collection of the securities of other corporations or of the issuing corporation; usually bonds, but sometimes a mixture of bonds and preferred stocks, deposited in a trust fund.
There are two ways of forming a new corporation out of a group of smaller ones. Either the existing securities may be exchanged for those of the new corporation, and so the corporate existence of the merging companies be extinguished, or the existing issues may be bought up and deposited in a trust fund, there to serve as security for an issue of bonds, the sale of which will largely finance the merger. The property pledged • in a collateral trust fund is usually a collection of securities of subsidiary or auxil iary companies. The pledging is an incident of se curing unified control. The quality of the bonds will match the quality of the collateral. If the collateral is stock the pledging process is an effort to create a bond of one company out of the stocks of other com panies, and nothing will result but an averaging or pooling of stock hazards. Protection is usually sought by providing a margin of safety between the value of the stocks in the fund and the value of the bonds issued, by frequent independent appraisals of the securities, and by a provision in the mortgage to the effect that the companies whose securities are pledged shall not issue any new securities with liens ahead of those pledged. Such precautions result in the creation of a security which may be likened to a first preferred stock. The need of frequent examina tion of the collateral, when it is composed of stocks, may be illustrated by the experience of holders of Rock Island collateral trust bonds. When the stocks of the Chicago, Rock Island and Pacific Railway were pledged, they were earning their dividend by a wide margin. Twelve years later they were hopelessly out of the dividend-paying class.