Whether prepared to meet the require ments of the New York Stock Exchange for steel engraving, etc., or not, a security should at any rate be prepared in such a way as to present a good appearance and to offer some reasonable obstacles to counterfeiting. Aside from questions of wear and tear, since most securities have rather a long life to run, to avoid decay they should be printed on a very high-grade paper. If this paper can be of some special make, as an additional precaution against counterfeiting, so much the better. Though for a small unlisted issue it may not be thought necessary to have the entire de sign especially prepared, it should at least be printed from a carefully guarded plate. A high-grade piece of steel engraving probably makes the best precaution possible against counterfeiting. Considering how poorly many securities are prepared, how ready a market many of them have, and how little they are scrutinized to discover possible counterfeit ing, it is a wonder that "green goods" men do not direct more of their energies in this direction rather than confining themselves to the carefully prepared and closely scrutinized government and national bank notes. How ever, there have been notable cases of counter feiting securities, and the danger is well worth guarding against. Knowledge of the existence of this danger on the part of some investors, and an appreciation of a good appearance on the part of all, does, however, add to the marketability of a security, and it commands therefore a price much more than enough higher to make up for the cost of a good appearance.
Whether bonds shall be issued under an open or a closed mortgage presents another consideration of marketability. Doubtless the investing public generally prefers a closed mortgage. It does not want to take the chance of having the protecting equity made thinner through the issue of further securities of the same rank as theirs. Besides, it fears that the bringing-out of additional amounts of the same security will have the natural effect of increasing the supply on the market, to depress the price. Even provisions in the trust deed assuring the maintenance of the equity do not overcome the handicap on that account. They require too much explaining. A "closed mortgage" tells its whole story in two words. The chapter on "The Instru ments of Corporation Finance" mentioned a number of provisions looking to the main tenance of the equity in the event of further issue of securities under an open mortgage. We shall not go more fully into the matter here.
Though the fact that a mortgage is "open" may tend to depress the price of the security, its value in future financing is likely to do far more than offset its immediate adverse influ ence. Securities with a junior lien would sell at a serious disadvantage. The fact that se curities of an issue are already outstanding and have a current market quotation makes a good foundation for more of the same issue. It is hard to assign a relative weight to each of these influences. All this discussion is, of course, apart from the matter of the mort gage being open, technically, because of bonds reserved to retire underlying issues, and refers only to the possibility of issuing more bonds for actual new expenditures on the property.
The replacement of the bonds of underlying issues with bonds of the junior issue can work only to the advantage of the outstanding bonds of the deferred security. It is true that if there were not reserved bonds of the new issue, the bonds of the old issue would have to be replaced with some security more remote than the new issue, which in turn would be come the prior security with the larger equity protecting it. Since, however, the reserved bonds will not when issued work to the posi tive disadvantage of the bonds of the issue then outstanding, they are not looked on with such disfavor as authorized bonds to be issued for expenditures on the property.
Since the chapter on "Amortization" went rather at length into the desirability of a uni form issue, that is, all of the same maturity, instead of maturing serially, we shall not go into that matter further here, but mention it now merely because of its bearing on the gen eral subject of this section. The discussion of amortization also mentioned the probable effect on price of making the bonds callable, and of providing a sinking-fund.
Also the chapter on "Form" considers the market effect of such matters as rate, term, denomination, place of payment, and making the bonds registerable and interchangeable. A corporation can arrange all these things in such a way as will give its securities the wid est appeal. For example, some people prefer a registered and some a coupon bond. If the corporation provides both, it does not exclude from the number of purchasers of its securities those who strongly prefer one or the other. And the experienced buyer, himself prefer ring one or the other form, but quite aware that some other investors do not feel the same way, appreciates an interchangeable bond, so that his particular part of the issue may, in case he should wish to put it on the market, appeal to as wide a range of purchasers as possible.
Most of the matters mentioned here as dis cussed elsewhere will not be mentioned fur ther now than just the reference. The matter of denomination may be worth a few words more. Though a good many issues provide bonds of $500 denomination, $1000 is the standard. It seems improbable, under the present method of selling securities in Amer ica, that bonds will be issued much in smaller denominations. The smaller amount will not stand the expense of selling. The only reason for issuing bonds in denominations of, say, $100 is to fit the pocket-books of people who cannot invest $1000 at a time. It costs as much to sell a $100 bond as to sell one of a $1000. A small investor would not, however, pay a higher proportionate price for the $100 bond than the larger investor pays for one of a $1000. If the banker is making a two-point profit, gross, on the issue, he makes a gross profit of $20 on each $1000 bond, but only $2 on the $100 security. Cost of selling and of putting through the transaction on the $1000 bond might be, say, $10. It requires just as much work to sell the $100 man his bond, and the clerical and other work of putting the transaction through are just as great. So it would cost the banker $10 to put through the $100 transaction on which he has made, gross, only $2. He would be doing business in the smaller denominations at a loss.