All this calls for a great deal of work and the exercise of careful banking judgment.
Any attempt to make money on the sinking fund obviously creates too great a temptation and leads directly to danger. The best skill and judgment in the world would not be able, with due regard to other considerations, ex actly to adjust the income on the sinking-fund to meet the interest on the debt. Enough has been said to show that a sinking-fund of this class cannot be a matter of exact calculation.
There remains a third form of sinking-fund amortization. To take advantage of this, a corporation must issue its bonds subject to call. In order to offset what an investor in clines to regard as a disadvantage, the uncer tainty as to when his loan may mature and involve the necessity for reinvestment, the corporation usually makes the price at which the bonds are subject to call some point above par — say, 105. The fact that the call price limits an advance in the market price also weighs in the minds of many investors. If the corporation must call some of the bonds every year, or may call any, or all, before the stipulated certain maturity, naturally a pur chaser will not pay more than the call price and run the risk of loss from having his bonds called earlier than the full term. The sur prising thing is that he will ever do so. Yet occasionally callable issues go to a market price higher than the call price. If the cor poration is under no obligation to call, but re serves the right to call simply as a privilege, this does not surprise so much. The pur chaser may argue that the corporation will not exercise the privilege, particularly if it have outstanding second mortgage securities that would thereby become a first lien and present an obstacle to the corporation if it should wish to take advantage of an enhanced credit in a general refunding operation. If the corporation has only one issue, callable at, say, 102, bearing five per cent interest and having fifteen years to run, which would make the call price of 102 a 4.80 basis, and the bonds should advance to 106.50 or approx imately a 4.40 basis, the corporation might be tempted ' to call the bonds at 102 and re fund by selling bonds at its apparent credit for a security of that class, on a 4.40 basis. For example, it might refund with 4s at 951, which would be close to the 4.40 basis. The
longer the security had to run the more prob able a situation that would make the refund ing profitable.
For considerations quite aside from amor tization, however, ordinarily a corporation should make its bonds subject to call. It should do this in order to enable it to take care of contingencies that might arise in the business that would make the right to call of the utmost importance. The possibility of wanting to create a much larger first mort gage issue to extend the business when the corporation could not finance on a second mortgage at all, or could do so only at a much greater disadvantage, is only one of many conditions that might arise to make the right to call tremendously important. Since the corporation for such reasons as these should reserve the right to call the issue as a whole anyway, the further disadvantage of making the issue subject to retirement in part, and certain of retirement in part from time to time for amortization purposes, does not add much to the disadvantage under which the issue may suffer. We shall discuss the calling of bonds further under the general head of "Form." If a corporation issues bonds subject to call, and amortizes them by calling the re quired amount each year, it keeps the ad vantage of a uniform issue with a correspond ing uniform price quotation, and consequent better market position than an issue fall ing due serially would have. Ordinarily the trustee must, in this form of amortization, if it can, purchase the sinking-fund bonds on the open market at a price lower than the call price. If the market price is not below the call figure, the trustee must draw bond num hers by lot up to the required amount and call the bonds drawn. The mortgages con tain full provisions for this, and for notifica tion to the holders of coupon bonds by pub lication of the numbers of the bonds drawn for call, and by letter to the holders of regis tered bonds. Often, however, the corporation agrees to call all the sinking-fund bonds at the agreed price, no matter what the market price may be, and thereby adds an attractive little element of speculation to the security. If an investor should buy his bonds at an issue price of 97, and should have them called in several years at 103, he would profit hand somely.