126. TYPES OF INVESTMENT CREDIT INSTRUMENTS1

(BONDS)

A comprehensive basis for the classification of bonds is not to be found in the bond lists nor in current market reports. The names and classes thus arranged are for purposes of convenient reference and usually follow the practice of the local exchange. Generally speaking, bonds receive their titles from one or more of the following characteristics: (1) The character of the corporation using them; (2) the purpose of issue; (3) the nature of security given for payment; (4) the terms of payment, and (5) evidence of ownership and transfer. The first of these five characteristics is used as a basis for general classification. That is to say, quotations are usually arranged under the following heads:

Government-state and national.

Municipal and county.

Railroad, express, and steamship companies.
Traction companies.

Gas, electric light, and water companies.
Bank and trust companies.

Investment companies.

Industrials.

Mining companies.

Miscellaneous.

CLASSIFICATION ACCORDING TO PURPOSE OF ISSUE

Among the many varieties of bonds which take their names from the purpose of issue the following may be noted:

Adjustment bonds, bridge bonds, construction bonds, consolidated bonds, car trust bonds, dock and wharf bonds, equipment bonds, extension bonds, founders' bonds, ferry bonds, general bonds, improvements bonds, interim bonds, interest bonds, purchase money bonds, refunding bonds, reorganization bonds, revenue bonds, subsidy bonds, terminal bonds, tunnel bonds, temporary bonds, unified bonds.

CLASSIFICATION OF BONDS ACCORDING TO THE CHARACTER OF SECURITY PROVIDED FOR PAYMENT

From the point of view of the security given for payment, bonds fall into two general classes, viz., (1) unsecured, and (2) secured. The

I

Adapted from F. A. Cleveland, "Classification and Description of Bonds," Annals of the American Academy of Political and Social Science, XXX, (1907)

400-411.

secured bonds may again be divided into two general classes, (a) those having personal security and (b) those secured by liens on specific property. These in turn may be subdivided as follows:

I. Unsecured.

a) Government bonds.
b) Corporate debentures.

II. Secured.

a) Personal security.

1. Indorsed bonds.

2. Guaranteed bonds.

a) Guaranteed as to principal.

b) Guaranteed as to interest.

c) Guaranteed as to both principal and interest.

b) Lien security.

1. By character of property pledged.

a) Real property.

1. Land-grant bonds.

2. Real estate bonds.

b) Personal property.

1. Collateral trust bond.

2. Sinking-fund bonds.

2. By the character or priority of lien.

a) First, second, or third mortgage bonds.

b) General mortgage bonds.

c) Blanket mortgage bonds.

d) Consolidated mortgage bonds.

e) Income bonds.

f) Profit-sharing bonds.

g) Dividend bonds.

3. By the character of the holding participation receipts.

BONDS CLASSIFIED ACCORDING TO EVIDENCE OF OWNERSHIP AND

TRANSFER

Considered from this viewpoint there are three classes, viz., coupon bonds, registered bonds, and coupon registered bonds.

Coupon bonds are issues the contracts for payment of interest on which are evidenced by separate coupons or contracts for payment, which fall due consecutively on the interest-paying dates. The coupons may be detached and constitute complete promissory notes in themselves, payable to bearer. The coupons are usually written

on small sections of a sheet of paper attached to the principal obligation and as they mature are clipped off and presented for payment. They are frequently presented for payment through a bank as a check or draft would be.

Registered bonds are credit instruments the interest obligation in which is expressed in the same writing or paper as in a promissory note, the ownership of the bond being registered as a means of protecting the payee against loss, necessitating a formal transfer and registration to transfer the title when the old instrument is canceled and a new one issued. Interest is payable by money delivery or by check sent by mail to the address of the registered holder.

Registered coupon bonds are issues the principal of which is registered, the coupons being made payable to bearer.

In practice a single bond issue may have any number of these many distinguishing characteristics, so long as they are not in conflict.

127. TYPES OF INVESTMENT CREDIT INSTRUMENTS1

(STOCKS)

For the sake of accuracy and convenience in expressing the interests of the stockholders in the capital stock, and in the corporate property and business which this capital stock represents, it is regarded as divided into equal shares, termed "shares of stock." When by purchase or otherwise a person acquires an interest in the capital stock, he becomes a stockholder in the corporation, and his interest is expressed in these shares of stock.

Certificates of stock are issued to stockholders evidencing the number of shares which they own. These certificates of stock are popularly, though incorrectly, referred to as "stock." The interest they represent in the corporation is also, and correctly, designated "stock."

The par or face value of shares of stock is fixed by the charter of the particular corporation, and, unless expressly limited by statute, is placed at any amount desired by the incorporators. One hundred dollars is the most common par value of shares.

It may be noted that the par value and the actual value of a share of stock may be very different. A hundred dollar share of stock in a prosperous corporation will frequently be worth several times that

* Adapted by permission from Thomas Conyngton, The Modern Corporation, pp. 45-57. (The Ronald Press, 1913.)

amount, while in an unsuccessful corporation it may be worth little or nothing. In either case the par value remains the same.

The "capital stock" or capitalization of a corporation should be very clearly distinguished from its "capital."

The capital stock is the total amount of stock the corporation is authorized by its charter to issue. This amount is fixed in the first place by the parties organizing the corporation-who are termed the incorporators and, once accepted and authorized by the state, may only be changed by formal amendment of the charter.

The capital, on the other hand, is the actual amount of property owned by the corporation—that is, its assets. It is obvious that the value of these assets is liable to change with the fluctuations of the business or from other causes.

In conservative incorporations the capitalization usually corresponds with the initial capital. That is, for every dollar of stock the corporation issues at the time of its formation it receives a dollar in cash or property. Later this relation will vary, the capital stock remaining the same but the capital increasing or diminishing with the fluctuations of the business.

Unissued stock is in itself a nullity. Until it is issued it represents nothing. It is not an asset of the company but is merely an unexercised right to issue stock when and as subscriptions for it can be obtained.

Issued and outstanding stock is that which has been issued for cash, property, labor, services, or other values, or which has been subscribed for and the subscriptions accepted by the company. The actual certificates by which this stock is represented may not have been issued, but as soon as a purchase is duly consummated or a subscription properly accepted, the stock affected is issued stock, and the subscribers or purchasers are stockholders of the company.

In most of the states payment for stock may be made in anything of value. If the corporation has received the full face value for issued stock in cash or in any other permitted form of payment, such stock is termed full-paid, and its certificates should be marked "Full-Paid" in order to indicate this fact. After stock has once been issued for full value, it may be sold at less than par without involving the purchaser in any liability for the difference.

If the corporation has not received the full face value for issued. stock, the stock is but partly paid, and the purchaser of such stock may usually be held liable for the amount necessary to render the

stock in his possession full-paid. This liability may be enforced either by the corporation, or, in event of its insolvency, by any creditor of the corporation.

It is to be noted, however, that if the corporation has agreed to accept less than the face value of stock in full payment, it is thereby estopped from collecting the deficiency, though the rights of creditors would not be affected by such agreement.

Common stock is the general or ordinary stock of a corporation with neither special privileges nor restrictions.

Preferred stock, as the term is usually employed, is that which has some preference as to dividends or assets over other stock of the same corporation.

Preferred stock may be either cumulative or non-cumulative as to dividends. If the latter, it must receive its preferred dividend for the current year before any dividend is paid the common stock, but if in any year its dividend fails or is only partly paid it loses the unpaid amount. The dividends of a cumulative preferred stock are, on the other hand, a charge against the profits of the company, accumulating in case of failure from year to year until paid, and taking precedence over any claims of the common stock. If its dividends are not paid in any year, or years, or are but partially paid, the amounts unpaid go over, or cumulate, and must be satisfied before the common stock receives anything.

Cumulative preferred stock is sometimes called guaranteed stock, but this is a misnomer, as its dividends are not guaranteed and e not payable unless profits are earned. The better use of the term 'guaranteed" is to designate stock of one corporation upon which the dividend payments have been guaranteed by another corporation— an arrangement common among railroad companies.

It is usually provided that preferred dividends shall be paid in full before the common stock receives any dividend. If there are further profits after the preference dividends are paid, it is sometimes provided that the preferred stock shall share equally in these with the common stock. More often-and always, unless otherwise expressly provided—after the preferred dividends are paid in any year, the common stock receives an equal dividend if the profits are sufficient, and both kinds of stock then share alike in any further dividends declared in that year. At times, however, the preferred stock receives its preferred dividend, but does not participate at all in any further dividends of that year.