If the managers of the corporation plan to make a general mortgage issue under an open mortgage with a large amount held in reserve for refunding existing issues, the bonds must bear a date long enough to cover all the un derlying issues and cover a period beyond sufficient to make them worth while as the means of the refunding operation.
Bonds of corporations operating under franchises limited to a fixed period should mature well within the life of the privilege.
Right to redeem: The right to redeem bonds some time before the obligation to pay them matures may perhaps properly form part of the discussion of the term they are issued for. We have several times mentioned the desira bility from the corporation's standpoint of retaining this right. When the first provision for financing shows itself insufficient, power to redeem the issue as a whole may become important in order to provide a basis for new financing. If the corporation's credit im proves more rapidly than the organizers an ticipated, the right to redeem may become important in order to enable them to take advantage of the improved credit. It may be that they anticipated the improvement in the credit, but could not at the time place sufficiently short-term securities to advant age.
The right of redemption of any part of the issue, in addition to the right to call the issue in its entirety, may appear desirable for sink ing-fund purposes. We discuss this under "amortization." Instead of the right to re deem in part, with the option of purchasing in the open market for sinking-fund purposes, the trust deed may obligate the company to call at the stated price the bonds for the sinking-fund.
Commonly the right of redemption in it self counts as a disadvantage in the market, and the corporation offsets this disadvantage by placing the call price of the bonds some where above par, as 102, 103, 105, sometimes even as high as 110. Assuming that the cor poration sells the bonds at a discount, their redemption before maturity would from the standpoint of mathematics be an advantage rather than a disadvantage, for then the in vestor would be getting the benefit of his dis count within a shorter time. From the stand point of the corporation this means paying a higher basis interest. The right of redemp tion presumably limits the possibility of an advance in the market price of the bonds to the call price. No one will pay a price for a bond and run the risk of having the corpora tion call it at a lower price within a very short time. When there is no obligation to call, and the likelihood is improbable, the price of the bonds does sometimes rise above par. A right
of call also presents the disadvantage to the investor of uncertainty as to the term of in vestment and the possibility of imposing on him sooner than he anticipates the care and labor of making a new commitment of his capital. This would be a stronger objection at a time when long-term bonds are in favor. Generally it ought not to weigh very heavily against the bonds in the market. Barring this last objection, and assuming the investor con tent with the possibility of his bonds going as high as the call price, he ought to regard the possibility of redemption prior to maturity as an advantage. Indeed, French investors regularly do.
Making the call price above par is rather cumbersome and something of a matter of self-deceit on one side or the other, seller or buyer, or possibly both. If it is improbable that the corporation will call them, whatever disadvantage the right of call might be sup posed to make ought not to weigh much against the market price. A probable exer cise of the right of call ought to adjust itself as readily and no more to the disadvantage of either party when the call price is par than when it is at a premium.
Interest dates: Corporations regularly pay bond interest twice a year. Compilers of "basis" tables showing the computed actual return bonds make on the capital invested in them assume a semiannual payment of inter est. Months run in couples in the minds of those dealing in bonds as a business. Those complementary months in order are January and July, February and August, March and September, April and October, May and No vember, June and December. A corporation issuing bonds will ordinarily choose to pay interest in those months in which the nature of the business is most likely to provide the funds, or to make one of the dates come near coinciding with the close of the corporation's fiscal year. The big dates, on which much larger amounts of interest are paid than at other times, are January and July, and the requirements for funds to pay interest and dividends at these times make a special de mand on the money market. Generally peo ple like to get their incomes at these times. The interest dates of a security may make a difference with individual investors, who may like to have their incomes paid at spe cial times, or may wish to place their invest ments so as to have their incomes distributed through the year. Sometimes the less fre quent interest dates, like March and Sep tember, are chosen to meet this demand.