In the best actual practice of amortizing by this method, corporations have adopted the form of keeping the bonds " alive " in the hands of the trustee for the sinking-fund and applying the interest on these bonds to the purchase of further bonds for the fund. The next page shows such a fund actually worked out.
A sinking-fund in the form just discussed gains the desired result of equalizing the bur den of the debt. It does not call for the diffi cult task of judgment of investing in other securities for a sinking-fund. It accomplishes directly the end in view, the amortization of the debt, and gives an assurance almost, if not quite, as strong as serial repayment that this will be done. The plan leaves the issue uniform in all respects and, therefore, sub ject only to the considerations of the callable feature, leaves it in the best possible position market-wise. It is mathematically certain that the amortization provisions equal the requirements. The cost to the corporation is as small as possible in order to gain the de sired advantages.
Though this form of sinking-fund is the best in use and contains the essential quali ties of the best possible plan of amortization, it can nevertheless be simplified and strength ened in several respects. The nominal keeping the bonds alive in the hands of the trustee shows how slowly the mind advances in prac tice. The idea of a " fund " for amortization prevails over the essential idea of amortiza tion itself. The plan of the bonds continu ing to draw interest probably results from the thought of a constant sinking-fund payment plus a constant interest payment making the burden of the debt constant. Keeping the bonds " alive " merely renders this plausible. Though they are in the hands of the trustee, which at law may prevent the extinction of the debt, the trustee has a double trust, one to the holders of the outstanding bonds and one to the corporation, to keep the purchased bonds, so far as the principal of the debt is concerned, as though they were dead and canceled. Indeed, in most cases the trustee must stamp the bonds, "Purchased and held for the sinking-fund," which would effectively prevent their negotiation. To all intents and purposes the bonds are dead. Their continu ing to draw interest is a mere device to equal ize the burden of the debt. Actually to can cel the purchased bonds would accord with the real situation and make a more artistic arrangement. The business would then take
the form of the corporation, annually or semi annually, appropriating a sum equal to the base sum obtained by computation plus the amount of interest on the bonds kept alive in the sinking-fund under the present form. The corporation would give this annually increas ing sum to the trustee for the purchase of bonds on the market or by call. It should be the duty of the trustee to cancel them when bought. The reluctance of trust companies to assume any real responsibility in connec tion with bond issues of which they are trus tees is well known. However, to give the bondholders as strong an assurance of amor tization as serial maturity involves, failure on the part of the corporation to provide at the proper time the stipulated amount for the purchase of bonds should constitute a default involving the same consequences as failure to pay interest when due. It should be the duty of the trustee to notify the bond holder of any failure on the part of the cor poration to provide for the amortization. Such a duty does not go beyond a mere admin istrative responsibility no greater than trust companies already accept in the execution of trusts.
Some of the expressions on these stock cer tificate forms may require explanation to people unfamiliar with financial paper.
"Shares of one hundred dollars each": That is to say, $100 is the "par value"; so that if the authorized capital of the corporation were $1,000,000, it would have a total of 10,000 shares. If the certificate should read: "Shares of ten dollars each," then, of course, the total number of shares of a corporation capitalized at $1,000,000 would be 100,000. To get a further understanding of what this statement may mean, read the discussion of "Watered Stock." "Full paid ": A corporation may issue shares to subscribers who have paid up only part of the amount agreed. In that event an assignee of the shares would get only what property the assignor had, and might be liable to the corporation for the amount due. The liability of the shareholder to the corpor ation is also an asset of the corporation to which creditors have a right. To indicate that no such liability to the corporation exists, its certificates bear the words " full " or "fully " paid.