Term: Considerations of purpose of issue, the credit of the corporation, the condition of the market, all affect the decision of the term for which a corporation shall issue its bonds. The term itself may be absolute or uncertain. That is, the bonds may run for a length of time that neither the debtor corporation nor the creditor bondholder can change. Or they may run for a term which the corporation, on the one hand, can shorten but cannot increase, and the bondholder, on the other hand, cannot affect. In that case it may be either that the corporation can redeem the bonds at any time, or at some special time, or within some special times. If the corpora tion may redeem the bonds only at or after a date which is nearer to the time of maturity than it is to the time of issue, we call them "optional," otherwise simply "redeemable." The bond used for illustration presents both situations. It is optional in that the corpora tion has the option to redeem it at par only on or after May 1, 1922. Since the corpora tion may repurchase it by paying a premium of two and a half per cent at any interest date before May 1, 1922, it is also called redeem able. We will discuss this further under the head of "right to redeem." Returning to considerations affecting the term of bonds, the purpose of issue requires first attention. When speaking of amortiza tion we discussed the idea of continuing the indebtedness in order to continue the advant age of trading on the equity. If the corpora tion issues the bonds for general corporate purposes, as, say, for constructing or extend ing its plant, the purpose of issue does not affect the term of the bonds. As a matter of safe conduct of the business, in order to assure a continuance of earning power the corporation should spend on its general pro perty sufficient funds to take care of deprecia tion and maintenance and so keep good the equity protecting the bondholder. When the corporation issues the bonds for a special pur pose, however, the nature of the assets it acquires with the proceeds may have an im portant bearing on the life of the bonds. The term should be well within the probable earn ing life of the assets. The corporation should not have to continue paying interest on property no longer productive of income. A bondholder must see to it that his security remains sufficiently unimpaired to protect him. For these reasons equipment bonds, for example, should not run much, if any longer than ten years. To take an illustration outside of private corporations, a munici pality should not issue bonds for paving pur poses to run for a longer term than the paving will last. Bonds issued to provide funds for the construction of an office building should mature well within what is likely to be valu able life of the building. This would take into account possible changes in the style of office buildings, a kind of depreciation due to obso lescence.
Another consideration, the credit of the corporation, may affect the term of the bonds. If those in control anticipate that some time in the future it will enjoy better credit, they will not want the bonds to run so long that the corporation will have to pay a rate of interest based on its period of poor credit for a good many years beyond the time when it should enjoy better credit. A new corporation presents this particular case. It has no estab lished earning power, or lacks the prestige of long continued good income. A corporation that has recently gone through a reorganiza tion offers the same considerations. Those
who have authority to fix the term of the bond will not want to make it exceptionally long. It will be advantageous, as soon as may be after the corporation has reached as good a credit as can be anticipated, to refund on a lower basis. On the other hand, they must make the term long enough not to embarrass the corporation by the necessity for refunding before its credit has reached a point where it can refund advantageously.
Converse considerations guide the decision on the length of term in issuing bonds of an old corporation at the height of its credit. Presumably the corporation wants to con tinue trading on the equity. Since that is the case, it can make a good bargain now that will save it from the trouble of refunding for some time, and may save it the necessity of making a poorer bargain in refunding at the end of a shorter term.
General market considerations, aside from the credit of the particular corporation, also affect the decision on the term of the bonds. When long-term interest rates are high, or to say the same thing in other words, when the price of bonds is low, obviously a corporation would be inflicting a handicap on itself to issue securities of very long term. So, as we should expect, during seemingly acute peri ods of high interest rates the corporations issue securities of an exceptionally short term. At the time of high long-term interest rates before and after the panic of 1907, con cerns like the New York, New Haven & Hartford Railroad and the New York Central Railroad issued many millions of notes run ning for three or five years. When they fell due, the corporation managers felt that inter est rates continued higher than they would be later, and refunded the first short-term securities with new issues running for similar periods. As a permanent method of financ ing, a constant succession of short-term notes would be expensive. In addition to the in terest the investor demands, the corpora tion has to bear the cost of selling each issue.
Without intending to indicate any special reason for the term, we shall name several MI portant issues of exceptionally long life. Lake Shore & Michigan Southern first mortgage 32s (dated 1897), due 1997. Missouri, Kan sas & Texas first and refunding 4s (dated 1904), due 2004. Also of the same road the first mortgage 4s (dated 1890), due 1990, and second mortgage 4s (dated 1890), due 1990. Morris & Essex Railroad first and refund ing 31s, guaranteed by the Delaware, Lacka wanna & Western (dated 1900), due 2000. Texas & Pacific Railway first 5s and second consolidated 5s (both dated 1888), and both due 2000. Norfolk & Western Railway first consolidated 4s (dated 1896), due 1996. St. Louis Southwestern Railway first mortgage 4s (dated 1891), due 1989. Union Pacific Railroad first and refunding 4s (dated 1908), due 2008. Manhattan Elevated Railway 4s (dated 1890), due 1990.
Fashions in the term of securities change. At one time for no very well-defined reason investors like those of long life, at others those of short life. Consideration of what the fashion is will also influence the decision on the term of the security. The fashion prob ably has little or no relation to any conscious thought about probable advance or deprecia tion in the future value of gold. An investor might well reckon with that question; though with doctors disagreeing, we can hardly won der at the investor's refusing to take much account of the matter.