Such an impossibility of .a practical uni form quotation does actually detract from the marketability of a security, and in conse quence lessens its value; for quickness of the market is an element of actual value. Doubt less the serial maturity, and therefore the lack of one quotation for an issue as a whole, explains some part of the fact that equip ment bonds have sold at relatively low prices considering their intrinsic merit as a security. Of course, in the case of equipment bonds the importance of amortization, and the assurance of it that a serial maturity gives, outweigh the matter of the market diffi culty.
Another disadvantage of serial maturity, though not necessarily inherent in the form itself, exists in the use of the form in practice. Since the annual or semiannual maturities in practice are generally of equal or nearly equal amounts, the serial repayment makes an un even distribution of the burden of the debt. A few figures will express this more quickly and plainly than words.
Take a debt of $1,000,000 bearing 6 per cent interest and having a serial maturity of $100,000 annually. That is to say, the debt is repayable in ten equal annual installments of principal. Burden of the debt will then dis tribute itself in this manner: and so on. The amortization charge, or amount of principal retired each year, remains con stant with the result of a steadily diminish ing interest charge. Consequently the total burden of the debt bears heaviest the first year and steadily grows lighter. When the enterprise is new, the heaviest charge comes at a time when the corporation can least conveniently carry it.
If the serial repayment offsets the dimin ishing of an asset through depreciation, as in the case of equipment bonds, such an uneven distribution of the debt burden becomes in evitable. The rate of depreciation does not adjust itself to meet the financial convenience of a corporation. As already stated, however, an unequal debt burden is not inherent in the nature of serial maturities. Proper computa tion could so grade the serial repayment that it would be small in the beginning and ad vance each year the exact amount the in terest charge declined. The discussion will illustrate this further on.
So much for serial repayment. On account of its interfering with the opportunity to make a market that an issue uniform in ma turity as well as in other respects affords, it seems undesirable except under special cir cumstances, as in the case of equipment bonds. There remains for us a discussion of
sinking-funds.
We can dismiss with a word or two the possibility of cash deposits to build up a fund with the trustee available and sufficient to retire the debt at its maturity. A trust com pany cannot on the average afford to pay an interest rate sufficient to offset the interest the corporation pays on the bonds outstand ing. If it can pay three, or even four, per cent, and the bonds bear interest at five per cent, obviously the corporation loses heavily on its sinking-fund, besides adding to the risk of its own business whatever risk there may be of the trust company failing. This form is ob jectionable mostly from the sixth considera tion, the cost to the corporation.
As a second form of sinking-fund, the cor poration could apply its annual amortization charge to the purchase of securities other than its own. If this charge were properly graduated, it would distribute the burden of the debt. A requirement in the trust deed that securities purchased for the sinking-fund be placed on deposit with the trustee would guard against the corporation impairing the fund under special stress. Question arises immediately, however, of the safety of the securities purchased for the fund. A diffi culty closely connected with the question is the proper adjustment of income return on the sinking-fund securities to offset the inter est payment on the corporation securities being amortized. If the outstanding bonds yield six per cent, unless the securities in the sinking-fund average to yield six per cent, the corporation suffers loss. Again, if the securi ties being amortized carry a high rate of in terest, any attempt to get an offsetting inter est rate in the sinking-fund securities would simply mean the addition of another risk to the risks inherent in the enterprise.
Getting the sinking-fund securities into cash available to meet the maturity of the outstanding bonds offers another difficulty. Unless all the paper purchased for the fund matures before the outstanding bonds, the corporation assumes the risk of the market in disposing of them. To have all the sinking fund securities mature in time to meet the payment of the outstanding bonds, yet not so long before as to cause substantial loss through a large cash deposit in the bank, would be impracticable.