5. Advertising sale of corporate notes.—In order that the operations of note brokers in selling commer cial paper may not be confused with the sale of cor poration notes, which, for the most part, are marketed like bonds, we have reproduced below an advertise ment from the Commercial and Financial Chronicle announcing the sale of the notes of the Shawinigan Water and Power Company. The advertisement illustrates clearly the nature of the issue and the way in which its sale is announced to the public. Most large issues of corporate notes are now marketed by bond houses and announced in this fashion.
.2. Notes are secured by deposit with the Trustee in New York City of bonds and stocks with a value at present market of over $3,350,000. The market value of these securities, under the terms of the indenture, shall at all times be at least 25% in excess of the face value of notes outstanding.
S. Earnings for the past ten years have continually in creased.
6. Corporate notes versus savings deposits.—If the investor were to hold his funds in bank, as a checking account, many of the stronger banks would not pay him any interest; in fact, in the writer's opinion, he would not be entitled to any. Some banks, however, particularly trust companies, will allow two per cent on deposits subject to check.
Savings banks, paying three or four per cent in terest, usually require ample notice of withdrawal, leaving the funds no more liquid, if as much so, as they are when invested in good six per cent notes.
The time notice required by savings banks is often evaded by borrowing the amount needed from the same bank, or another one, assigning the savings ac count as collateral to the loan. The loan in such a case usually bears six per cent interest and matures on the same day that the time limit on the savings account expires, the latter being merely transferred to the bank's account to liquidate the loan. In most cities, the banks have agreements among themselves, sometimes in the form of a clearing house restriction, not to loan on savings accounts or waive the time limit. When money is easy, however, and banks are not earning much on their interest-bearing accounts, they will usually be willing to waive the time limit, or else loan against the savings account.
The loaning is more to their advantage than waiv ing the time limit and is therefore more frequently used as it retains the savings account intact and en ables the bank to make a six per cent loan with per fect security. Even if his funds at four per cent can
be had by the depositor without notice, there is much to commend the temporary investment in six per cent notes instead. In the first place, the yield is probably fifty per cent greater on the notes, six per cent or more against four. In the second place, if savings-account funds are procured without notice, the bank either de ducts all the interest, or allows interest only to certain even dates. If a temporary loan against the account is made, the bank charges six per cent on the loan, thus absorbing the entire advantage to be gained by removing the funds and reinvesting them at six per cent. In other words, the customer is borrowing his own money and paying the bank two per cent on it until the savings-account notice expires.
It should be remembered, however, that corpora tion notes are ordinarily issued in quantities only dur ing times of a shortage of long-term capital. At such times bond yields are high as a rule, the banks have good opportunities for profit on their interest-bearing accounts, and are therefore loath to release them with out notice. For these reasons, investment bankers and large private investors, having surplus funds awaiting future use, to an increasing extent are pre ferring corporation notes over interest-bearing sav ings accounts.
It may be asked, why not invest such funds in good active stock-exchange securities, which may be sold at any time, instead of in notes which have but a lim ited market? Many do this with their idle funds. Others, however, in an increasing number, prefer the corporation notes, in spite of their more restricted market, because of their higher yield and the fact that they do not fluctuate much in value on account of their rather early maturity. Bonds are subject to market fluctuations and do not in ordinary times yield over four or five per cent upon the safer issues. Moreover, corporation notes are rapidly achieving a broader use and more active market. They may now be classed as a standard type of investment security.
7. Security behind corporate notes.—Long-term notes, when issued in series and sold to the public, are usually secured by the deposit of collateral with a trustee, under a trust agreement protecting all note holders. This is particularly true of large issues. Large individual notes, or smaller issues in series, however, frequently have no lien security pledged be hind them.