The price of the latest purchase may be used in determin ing the proper carrying value of similar securities. When this price is used, the bookkeeper figures the new book value on all the issues in which trades have been made the preceding day. A purchase or sale of one bond, unless made at the exact price at which they stand on the card, changes the book value of all the bonds of that issue owned by the bank. When a purchase is made, the number of bonds bought is added to the number owned, and their cost is added to the cost of those previously owned. The total number of bonds is then divided into the total cost to give the price or book value per bond. When bonds are sold, their number is subtracted from the number owned, the proceeds of the sale are deducted from the cost of the total bonds on hand, and the total number of bonds left is divided into the cost left, to find the book value. When on the same day some bonds are sold and others of the same issue arc bought, the net change in price is used in calculating the new book value.
The Bond Ledger All transactions are entered in the bond ledger. The ruling of the debit and credit side of this ledger is identical and has columns for date, par value, name of purchaser or seller, "flat" price, "and interest" price, amount paid or received on account of the principal of the bond, and the amount of interest paid or received. All issues owned by the bank are•indexed, say, in the front of the ledger, but when securities other than these are pur chased or sold for a customer, the entries are made in a miscellane ous section of the ledger, alphabetically arranged. A full description of the securities is entered in the index and also on the folio where the account is kept. This description includes the name of the issuing corporation, the kind of bond (first mort gage, general mortgage, etc.), the date of issue, date of maturity, interest dates, and whether purchased for the bank's own account, joint account, participation, or syndicate.
A separate ledger is kept for United States bonds, because these securities are used for securing national bank notes and therefore require to be specially reported to the Comptroller of the Currency. This ledger has columns for the price, par value, pre mium, and interest, and also contains a record of bonds borrowed and loaned and of bonds to secure circulation.
Once a month the bookkeeper strikes a trial balance of the bond ledger, and this balance sheet is sent to the loan and dis count departments and the foreign division for checking by them, to guard against a loan exceeding the legal io per cent limit of loans to one borrower. The ownership of the securities of a corporation is regarded as a loan to that corporation.
Several other statements are ordinarily prepared in the bond department. For instance, a daily statement of all purchases and sales made for the bank's account and showing the balances Of the ledgers is prepared for the cashier; a weekly statement of like contents is sent to the directors' meeting; and a periodical statement is drawn up of the kinds of bonds owned—municipals, governments, tractions, and so on.
The Bond Earnings Book The bond earnings are kept in detail in an account in the back of the bond ledger or in a separate bond earnings book. The sources of earnings are interest, trading profits, joint-account profits, participation, and syndicate profits. The interest on the United States bonds must be reported to the Comptroller of the Currency and is therefore kept separate from other earnings.
Accrued interest on all securities owned is figured on the last day of each month and credited to bond earnings. A monthly statement is prepared giving these earnings in detail.
Because of the different purposes for which commercial and savings banks buy and hold bonds, methods of calculating the earnings from the bonds owned also differ. In commercial banks the amount of interest due is determined by figuring the accrued interest on the bonds on hand, from the last interest date to the date under consideration; to this is added the amount of interest received on bonds sold, and from this total is deducted the amount of interest paid on bonds bought, the result being the amount of interest actually accrued.
Other profits are entered only when actually received. For instance, if the bank is carrying $ioo,000 of bonds at a cost which, at market quotations, shows a considerable profit, this profit is not entered in the earnings book until all the bonds are actually sold and delivered, unless, as sometimes happens, bonds are actually sold under such favorable conditions that the bank still has bonds on hand and a credit instead of a debit balance in the account. In this event the bond ledger may be charged and the bond earnings book credited with an amount which makes the bonds stand a few points below the market quotation.
If bonds are bought at a discount, they increase in value as they approach maturity, and savings banks, which buy the bonds with the expectation of holding them until maturity, rightfully add this accumulation to their cost as they are revalued from time to time. Commercial banks, however, buy bonds more as a dealer, who invests his funds in earning assets and not with the expectation of holding them till maturity. Whenever it is possible to sell them to advantage—and customers are sought all the time—they are sold and the proceeds are immediately reinvested in other bonds. The accumulation of discounts is, therefore, a less important source of profits and the increases in value are not entered in the earnings book until the bonds are sold. The conservative bank, however, amortizes the premium and writes off any great depreciation in the value of any bond held a long time.