MORTGAGE BONDS 1. Long-term, loans. We have seen that trade credit and short-term loans may be safely relied upon only for working capital, or pending the assured sale of permanent securities. In any event, they must be well covered by liquid assets.
Permanent or fixed assets, unless secured by the sale of capital stock, may safely be obtained only by the issue of bonds, either simple or reinforced obliga tions. Usually, the bonds are issued in series, in a formal manner, under seal, and are reinforced by a pledge of specific assets.
Whereas short-term obligations are issued to obtain liquid assets or working capital, it is obvious that long term loans are ordinarily offset by capital assets, that is, by assets in the form of plant or productive equip ment. Working capital, or current assets, consists mainly of articles intended for resale, whether in the raw state, in process of production, or the finished product. Capital assets, on the other hand, consist of things which are not intended for resale, but which are utilized or consumed in the processes of produc tion, as stated in Chapter II.
2. Classification of bonds.—The following classifi cation of bonds is not exhaustive, but is sufficient for our purpose. They may be classified 1 according to: 1. The character of the issuer—under this heading may be found the following principal types: (a) Railroad bonds (b) Public utility bonds (not including rail roads) Municipal bonds (d) Industrials (e) United States government bonds (f) State government bonds (g) Miscellaneous bonds, including timber, land grants, irrigation, levee, drainage, real estate, etc.
2. The purposes of issue (a) Purchasing or consolidating properties or companies (b) Construction and making extensions (c) Improving (d) Unifying, refunding or consolidating other issues.
3. The privileges and conditions of payment or transfer (a) of principal Convertible bonds Redeemable bonds Callable bonds Serial bonds Registered bonds Negotiable bonds Sinking fund bonds (b) of interest Coupon bonds Registered bonds Income bonds Participating bonds Profit sharing bonds 4. Their security (a) Simple obligations Plain bonds Debenture bonds Long-term notes Certificates of indebtedness (b) Reinforced obligations Bonds secured by guarantee Assumed bonds Guaranteed bonds Indorsed bonds Bonds secured by lien, on 1. Personal property
Sinking fund Equipment Paper collateral (known as collateral trust bonds) Stocks Bonds Mortgages Leases Certificates of interest 2. Realty, according to: Character of the property mortgaged Priority of the lien.
Typical names of bonds are in italics in the above classification, but no attempt has been made to pre sent an exhaustive list. Bonds secured by mortgages upon real estate, for instance, appear under thirty or forty different names, which sometimes tend to con ceal inferior liens. Such titles as "general and first mortgage bonds," "first and refunding mortgage bonds," etc., are apt to be misleading, as the first mort gage may cover only a very small portion of the property.
Obviously, any classification of bonds according to the character of the issuer is merely for convenience in studying the market movements of each class. It is only by watching the average market condition of each type that the relative desirability of any one is sue may be ascertained. The bonds in each of these general classes possess certain typical characteristics, but with varying grades of risk and income.
The classification of bonds as to purposes of issue is of very little value, except that by indicating a productive use for the new capital, the marketability of the bonds may be somewhat improved.
Classification according to the privileges and con ditions of payment or transfer is valuable because each such characteristic bears directly upon the marketability of the bond and indicates a very definite right or restriction to the holder. One desiring to borrow, for instance, will prefer a negotiable bond, payable to bearer, passing by delivery and with inter est coupons attached. The investor with a little sport ing blood in his veins may prefer the convertible bond, sacrificing a little present safety for the prospect of future speculative profits. The investor desiring a permanent and undisturbed income, with safety first, will not care for a redeemable bond, which the issuing company may pay off on short notice, compelling him to seek another investment. This merely illustrates the importance of classification.