I nvestment securities s. Essential CKaracteristics and Values By JAMES R. BANCROFT President, American Institute of Finance. Manager, Investment Department, Babson Statistical Organization, 1917-20. Instructor in Investments, Babson Institute, 1919-20. En^a^ed in Banking and Brokerage Business, 1907-16 AMERICAN INSTITUTE OF FINANCE 00 ON o »-H r< f^ ^ ITi VO I^ 00 ON o ,^ ri r^ Tt iTi VO i^ X o^ o 1-H r^ \0 ^ r^ r^ t^ 1^ i^ 1^ t^ rN r^ r^ X X X X X oo X X X 00 ON ON ON 00 1-H 00 1-H 00 00 I— ( 00 00 X 1-H 00 X 1— i X »-H X f-H X X ▼— 1 X 1-H X X X 1-H X 1— ( X 00 X 1-H X 1-H X 1-H Price S IN JVv ^.^ DOLLAI -/— \^ -y- ^^ /"\ .. V \l .'- ^'' ' \.'" 11 /^ y / / 1 * ''v' i i i - X lif A L J r i IWO ME / / 1 # # {( / A.. .^^ / / •""f 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 till The cliart above shows the trend of Investments for the fifty years, 1870-1920, from two stan both show the reeently past abnormally low levels and give a picture of the coniplete cycle, but thi available. It lias been the investor's "Chance of a Lifetime." ■0 00 i-H »— 1 00 0^ 00 o o ON 1—1 1— ( o 1— ( O ON O ON T— 1 o ON o ON 1-H o ON 1-H 00 o ON ON o 1— ( o ON I-H T-H »-H »-H 1-H ON »-H ON T-H »-H ON »-H 1/5 »-H ON 1-H ON 1-H 1-H ON 1-H 00 1-H ON 1-H ON 1-H ON 1-H A> r-^ -%#< \ A^y r ^A /^--^ Wv J V V ^V^ K V ,' ''%-■-, Scale ..'- ^«.. '♦.--•^ Prices in \ commoditi ES %' ■■• '\-. ''"\ u -24 -48 -72 (O 1 1 n r a A r ^1 T #\ !SUREivitnio Bond Values 1 % 1 % % % 79 iJ20 1 1 1 1 1 1 MM 1 1 1 1 1 1 1 1 ttts: first, actual price fluctuations; second, the trend in terms of what the income will buy. They r levels for bonds in terms of commodities give the real measure of opportunities that have been Investment b nvestment Securities Essential Characteristics and Values By JAMES R. Bi^NGROFT President, American Institute of Finance. Manager, Investment Department, Babson Statistical Org,anization, 1917-20. Instructor in Investments, Bahson Institute, 1919-20. En^a^ed in Banking and Brokerage Business, 1907-16 AMERICAN INSTITUTE OF FINANCE BOSTON OUR "COMPLETE EDUCATIONAL COURSE" IN THE SCIENCE OF MAKING MONEY MAKE MORE MONEY This list is arranged in the order of proper reading. The books are accompanied by a series of test questions, key prob- lems and analyses outlines, enabling the student to apply the knowledge acquired to immediate stock market and investment conditions. 1 . Developing Financial Skill 2. Forces Which Make Prices 3. Alanipulation and Market Leadership 4. Handling a Brokerage Ac- cotmt 5. Market Information 6. The Essential Features of Securities 7. The Value of a Railroad Security 8. Industrial Securities 9. Oil Securities 10. Mining Securities IL Investment Securities 12. Business Cycles 13. Measuring arid Forecasting General Business Condi- tions 14. The Technical Position of the Market 15. Money and Credit 16. Business Profits 17. Launching a New Enterprise 18. Securing Capital for Estab- lished Enterprise 19. Internal Financial Manage- ment 20. Search for Bargains Copyright, 1922 by American Institute of Finance H6- TABLE OF CONTENTS -k Pafee Chapter I. Securities as Investments Purposes of Investment 7 -^ Different Forms of Investment 8 Bonds as Investments 9 ■^ Preferred Stocks as Investments 9 ' Common Stocks as Investments 10 ^ Returns on Investments 11 I ■s^ Chapter II. Different Types of Investment Bonds Classification by Character of Issuer 13 Government Bonds 13 Municipal Bonds 14 Corporation Bonds 15 S^J^ Classification by Security 15 Different Types of Mortgage Bonds 16 pyO Second Mortgage Bonds Rare 17 v\ General Mortgage Issues 17 N Refunding Mortgages 18 ^ Consolidated Mortgages 18 Prior Lien Bonds Merit Study 19 ^ Closed and Open Mortgages 19 V^ Classification According to Maturity .20 S\ Long Term Bonds 20 ^ Short Term Notes 21 Serial and Sinking Fund Bonds 21 Convertible Bonds 22 Coupon and Registered Bonds 23 ^ Chapter III. Factors Affecting Bond Prices ^c-^ The Initial Consideration in Investments 25 ^^ Two Types of Influencing Factors 26 Permanent Factors 26 Commodity Prices 27 Spending vs. Saving 28 Efficiency in Production 29 >^ -^ Forecasting Long Term Developments 30 ^o Temporary Factors Affecting Bond Prices 31 Prosperity and Depression 31 Effect of Taxation on Investments . . .■ 32 447469 4 Contents Chapter IV. The Trend of Bond Prices Pa^e Temporary and Long-swing Movements 35 The Temporary C^^cle Movement 35 Bond Prices First to Decline 36 The Long Cycle Movement 36 The Period of 1865-1895 37 The Period of 1893-1898 38 The Period of 1900-1920 38 The Chance of a Lifetime 39 Chapter V. Railroad Bonds as Investments Marketability a Prime Consideration 40 Capitalization of Our Railroads 40 The History of Railroad Development 41 Deterioration of Railroad Credit 42 Federal Operation 43 Recent Legislation 44 The Question of Valuations 45 What of the Future? 46 Railroad Issues Legal for Savings Banks 46 Chapter VI. PubHc UtiHty Bonds Business Stability 48 Regulation by Commission 49 Gas Companies 49 Electric Lighting Companies 50 Electric Power Properties 51 Telephone Companies 52 Street Railways 53 Rapid Transit Lines 54 Surface Lines 54 Interurbans 55 The Future 55 Chapter VII. Industrial Bonds History 57 Prevailing Types 58 Convertible Issues < 58 Recent Financing 59 Industrial Preferred Stocks 60 Co ntents 5 Chapter VIII. Government Bonds Pa^e Characteristics 62 Wealth, Debt and Income 62 Liberty and Victory Loan Issues 63 The Market Action of Liberty Bonds 66 The Future 67 Position of Foreign Governments 68 Wealth and Income — a Comparison 68 Methods of Obtaining Income 70 Expansion of Note Issues 70 Domestic Securities Preferable 72 Chapter IX. Miscellaneous Issues Municipal Bonds 73 Methods of Payment 73 Tax Position 74 Real Estate Bonds 75 Elements of Risk 75 Advantages and Disadvantages 76 Federal Farm Loan Bonds 76 Repayment of Loans 77 General Liability 77 Tax Exemption 77 Chapter X. Reading an Offering Circular Position of Prospective Investor 78 Nature of the Business 79 Location of the Enterprise 79 Capitalization 80 Purposes of the New Issue 80 Amount of the New Issue 81 Security 82 Earnings 82 Balance Sheet 83 Summary 84 Test Questions Analysis Outline for Utility Companies CHAPTER I SECURITIES AS INVESTMENTS Purposes of Investment Investment funds are accumulations from business prosperity or successful speculation. The desire in investing these funds is to conserve principal and by putting it to work to improve one's income. Therefore, investments are made primarily for the return they give and not for profits. For example, if any individual who has accumulated, let's say, considerable money, decides to use $10,000 in a conservative fashion, he would not think of allowing it simply to lie in a bank at a low rate of interest. If vigorous and forward-looking he would desire that such ac- cumulated funds should earn a good return with safety. During recent years his attention would have turned to the low prices for long term investment securities. He could, for example, have purchased $10,000 West Shore Railroad First Mortgage 4's, 2361. In doing so he would have had an absolute first mortgage on a railroad property that would give him an annual return on his money of 5^% or an annual income on an invest- ment of $10,000 of $550. It is this annual income that interests him primarily. The question of whether the market price of his investment purchase is four or five points lower than six months previous, or will be four or five points higher six months later, is not of prime importance. It is in this way that investment differs from speculation. We must grasp this difference immediately. Speculations are made absolutely for profit. Investments are made primarily for income. While the desire to improve or at least maintain the principal of an investment must always be present in order to have the investment successful, the primary purpose is to bring in additional income. 8 Investment Securities Different Forms of Investment Placing money in a savings bank is an elementary form of investment. The advantages of this form of investment are that, except in extremely critical times, the money can be with- drawn immediately at its full value. The price paid for this privilege is the relatively low return or income received from such an investment. Savings banks are an excellent form of investment for the uneducated individual and for the man who does not care to or is not in a position to study the fundamentals underlying investment values. Insurance may be called another form of investment although the primary purpose of insurance is protection. The first thought of every young man with growing responsibilities should be toward this form of investment. A growing family needs protection. Investments that give good returns, however, and which appeal strongly to the average business man, are securities and to some extent real estate. We will treat primarily of securities as investments. The strongest and most satisfactory form of investment security is bonds. A bondholder is in the same position as the lender of money. He has a direct claim against the assets of the borrower. With the increasing in- dustrial prosperity of the past ten years, and perhaps to greater extent with the increasing income taxation of the past five years, preferred stocks have become a common form of investment. The income received by any individual from bond purchases is subject to both the federal normal and super-taxes. The income received from investments in preferred stocks, on the other hand, is exempt from the normal federal income tax. Under war and post-war taxation, the net income received from a preferred stock paying 6%, is quite a little larger than the net income received from a bond paying the same rate. Of equal or greater importance perhaps in accounting for the popularity of preferred stocks as investments has been the tax situation of the issuing corporation. Corporations have been allowed to count money received from selling preferred Securities as Investments 9 stock as invested capital. They were allowed a basic exemption on invested capital under the war excess profits tax law. Money obtained by selling bonds could not be counted as invested capital. It is simply borrowed and the company agrees to return it at a certain fixed date in the future. The common stocks of certain properties that have paid dividends uninterruptedly for a number of years are considered investments by some individuals. Stocks of such properties are called seasoned common issues. The risks in these various forms of investment will be discussed and carefully considered. Bonds as Investments Bonds with very few exceptions carry a definite promise as regards the payment of principal and interest. The bondholder simply stands in the position of a lender. For example, the owner of $1,000 Pennsylvania Railroad General Mortgage 5's, 1968, has, in effect, loaned the Pennsylvania Railroad $1,000 on which he receives a stipulated interest payment. The company also agrees to repay the principal, $1,000, in 1968. In the event of the failure of the Pennsylvania Railroad to pay either the interest on this loan when due or the principal when due, the owner has the same right of foreclosure as the holder of a per- sonal mortgage note. In view of the form of corporate enter- prise bondholders cannot and do not act individually in event of default of interest or principal. A committee who looks after the interests of the large number of scattered bondholders is formed which is called a protective committee. The princi- pal is exactly the same, however, as in an individual loan. Preferred Stocks as Investments A stockholder, on the other hand, whether preferred or common is not a creditor of a corporation but is a partner in the enterprise. As stated above, a corporation or company is a borrower of money through its bonds. The bondholder is a lender. Stock certificates are merely an evidence of ownership. They certify a share in the fortunes and risks of business enterprises. 10 Investment Securities Preferred stocks, however, have come to be a broad medium of financing by corporations because of their favorable situa- tion in regard to taxes, as pointed out above. Such financing has been made attractive to investors by surrounding pre- ferred issues with restrictions intended to protect the purchaser. The clearest way to make this plain is by a specific illustration. The Goodyear Tire & Rubber Company in offering its pre- ferred stock, agreed that the dividends, which were fixed at 7%, should be cumulative. That means that in return for the stock- holder agreeing to accept maximum payment of 7% the company agrees that if the full 7% dividends are not paid in any one year it, nevertheless, tries to assure ultimate payment of the full 7% and all unpaid back dividends before any distribution can be made to common stockholders. This is about as favorable an offer as could be made to preferred stockholders as they could not, being partners and not creditors, have the right of foreclosure. The Goodyear Tire & Rubber Company further agreed to maintain its assets at the equivalent of 200% of the preferred stock to be outstanding and to maintain its current assets at 110%. It agreed not to mortgage its property without the consent of 75% of the preferred stockholders and it placed a sinking fund of 2|% annually on the preferred stock issued. In other words it tried to insure the stockholder against a frit- tering away of its assets. It also protected the stockholder through the sinking fund, which retires 2^% of the stock out- standing annually, thus apparently constantly increasing the strength of the balance remaining. In spite of such restrictions, however, the right of foreclosure in event of difficulties was lacking, and in the difficulties of 1921 these restrictions amounted to practically nothing. Preferred stockholders are now subject to $55,000,000 bonds and a large issue of prior preferred stock has been placed ahead of them. Common Stocks as Investments Bearing in mind that a stock is simply a certificate of partner- ship in an enterprise, and that common stocks cannot be sur- rounded with restrictions as preferred stocks can, it is evident Securities as Investments 11 that the puixhase of common issues as investments is quite hazardous. Fluctuating earnings with periods of prosperity and depression are reflected acutely in the earnings shown on common stocks. Even stability of earning power over a number of years is not sufihcient insurance of continued safety. Note, American Sugar Common. Other illustrations of this fact are the situations of the common stockholders of New Haven, Boston & Maine, Chicago, Milwaukee & St. Paul. These stocks were considered by many to be conservative investments a few years ago. Yet today none are paying dividends and all are selling for less than 50% of their par value. Common stocks furnish attractive mediums for speculation but rarely for investment. Returns on Investments In making investments clients will find that the majority of banking and brokerage houses give the return obtained in terms of yield. For example, if a 5% bond, due in 25 years, is offered to the investor at 80, the yield on the investment is 6.70%; but let us consider what this includes. A pencil and paper will show that a 5% bond, bought at 80, paying in other words $50 on an investment of $800, gives a return of 6.25% a year, not 6.70%. The yield of 6.70% takes into consideration that 25 years hence the investor who today buys a $1,000 bond for $800 will receive repayment of his principal, $1,000. This yield of 6.70% cannot be figured easily by an individual. It is apparent that no portion of the $200 premium that will be received 25 years hence is obtained in any year prior to the maturity of the bond. Again in figuring the yield on a bond the presumption is made that the income received annually would be reinvested as received at the same average interest rate as the annual return. The yield on investments, therefore, can be figured only through a mathematical process. It is obtained for every -day use by referring to tables of bond values published for the purpose. The annual return on an investment, however, can be obtained simply, as shown above, hv dividing the income 12 Investment Securities received by the price. When only annual return is considered by an investor in figuring his income, the approach of the bond to its par value as it nears maturity can be figured as apprecia- tion. We feel, therefore, that in order to have an accurate account of yearly income clients ought to give greater weight to annual return in purchasing investments than to so-called yield. -i CHAPTER II DIFFERENT TYPES OF INVESTMENT BONDS Classification by Character of Issuer Investing is a science; speculation an art. Investing must be based on scientific principles and classification. There are numerous ways of classifying investment securi- ties. In order to treat the situation thoroughly we will discuss their classification from the standpoint of the issuer, from the standpoint of security, and from the standpoint of maturity. All these classifications are important. The first classification divides the types of investment securities from the most elemen- tary point of view. The second allows the investor to study the values underlying issues offered. The third brings out the question of permanence or extent of the investment. Under the classification by character of the issuer, the principal divi- sions are Government Bonds, Municipal Bonds and Corporation Issues. Government Bonds Government bonds have always been considered the highest type of investment. To some extent, this conception has been lowered in the last four years. It has been found that under war conditions governments can put out bond issues at such tremendous rates that the credit of the respective governments deteriorates rapidly. Developments of the past five years in Europe have shown that the credit behind government bonds depends for its value on the confidence and respect which that government commands. A government at peace, having a small debt, levying comparatively light taxes on its people and expressing and satisfying the ideals and aspirations of the great mass of its people, has a high credit. Insofar, however, as 14 InvestmentSecurities these conditions fail, public confidence fails and credit fails also. In other words, the idea that has been prevalent for a number of years, that behind the bonds of any nation are all the physical or material assets of that nation, is an illusion. Furthermore, it is not correct that the power to \exy taxes against such physi- cal wealth is behind such bonds. While the government has the legal right to levy taxes without limit, there is a limit to its power, which limit depends on the confidence and respect of its people. The real assets behind government bonds are the good will of the people and the values behind government bonds must rise and fall with the development of conditions that improve or destroy such good will. Municipal Bonds Municipal bonds, so-called, are bonds issued by our states, cities, counties or townships. The payment of principal and interest on municipal bonds rests on the taxing power of the issuing community. The taxes are collected in the majority of cases, by a levy against the property of the issuing munici- pality. This tax is levied in direct ratio to the assessed value of taxable property. Such taxable property includes all land, real and personal estates. When municipalities issue bonds to obtain funds f^r proper- ties that are self-supporting — waterworks, lighting plants or street railways, for example — the bonds are nevertheless supported by the taxing power against all property. An ex- ample is the money issued by the City of New York to assist in the construction of the enlarged subways, which has taken place in the last five years. Increased rapid transit facilities in any city or locality mean increased property values, and thus an increased assessment value. Hence, all property owners are taxed to provide finances. Another form of municipal financing wliich is not as promi- nent is the issue of bonds the principal and interest of which are payable from a special tax levied only upon the property benefited. These bonds are called "special assessment issues." D iff event Types of Investment Bonds 15 Usually they cover such operations as school, highway, or drainage improvements. The credit rating of this class of bonds is not as high as municipal issues protected by taxes levied against the entire taxable property. Corporation Bonds Corporation bonds are our most common form of investment security. Neither government nor municipal issues carry a mortgage claim against specific property value. Corporation bonds are clearly a claim on the assets of the issuing corporation according to priority of issue. For example, a mortgage bond has the actual right of foreclosure against the particular property on which it is a mortgage. A debenture bond, so-called, while not a mortgage, still possesses, in event of difficulties, the right of foreclosure against the assets, tangible and intangible, of the issuing corporation. The tremendous commercial expansion of our country in the last twenty years has given rise to great diversification in corporation issues. Whereas, twenty years ago, the position of a corporation bond could be readily as- certained from its description, the interweaving of securities has become so marked that we feel it necessary to point out here some of the more important characteristics of the different mortgage, debenture and collateral trust bonds that are put out by our various corporations. Classification by Security The three most common forms of corporate bond issues available to investors are mortgage issues, collateral trust bonds and debentures. Mortgage bonds are exactly what the name implies. They are an actual lien against certain physical property which is enumerated in the indenture under which the bonds are issued. That is, mortgage issues contain an express stipulation in regard to the property against which they are a mortgage. Collateral trust bonds are not a mortgage. They are secured on intangible porperty, that is on other stocks or bonds. An 16 InvestmentSecurities example is the American Telephone Collateral Trust 5's, 1946. The American Telephone & Telegraph Company is a holding company owning or controlling numerous operating subsid- iaries all over the United States, the majority of which are corporations having stocks and bonds of their own outstanding. It is naturally better to borrow large sums infrequently than to be in the market constantly for small amounts. Therefore, the parent corporation issues its own securities, putting up as collateral various stocks and bonds of subsidiaries. The actual security of the collateral trust bonds, it will readily be seen, depends in turn on the ^•alue of the subsidiary collateral plus the somewhat intangible credit of the holding organization. Collateral trust bonds must be carefully studied as regards the actual security or collateral deposited. Debenture bonds are simply promises to pay. They are bonds that have the same credit rating as promissory notes. If the property has mortgages outstanding, the debenture bondholders must await the satisfaction of mortgage bondholders in event of difiliculties before their position will be considered. Different Types of Mortgage Bonds The clearest type of mortgage security is, of course, the absolute first mortgage. We are familiar with this bond at the present time, particularly in regard to real estate. There are many real estate first mortgage issues outstanding. With the expansion of corporations and the building up of large or- ganizations piece by piece, the "blanket first mortgage" has largely disappeared. It has returned, however, in some of our recent railroad reorganizations. The Western Pacific -First 5's, 1946, an example, are a first and only mortgage on about 1,000 miles of road. The difticulty in issuing a straight first mortgage issue is clearly shown in considering the United States Rubber First and Refunding 5's, 1947. There arc some- what over $59,200,000 of these bonds outstanding. They are an absolute first mortgage on all the property of tlu' company with the exception of the Canadian Consolidated Rubber Com- pany, one of the smaller subsidiaries. This subsidiary has D iff event Types of 1 71 vestment Bonds 17 $2,600,000 6's outstanding which do not mature until 1946. As a result, the later issue of the parent organization, the United States Rubber Company, simply became a second mortgage on that portion of the property and the bond, as a result, was termed a "first and refunding" mortgage issue. Second Mortgage Bonds Rare Straight second mortgage bonds have largely disappeared from existence. Some bonds which are second mortgages are given other titles. An example is the Colorado & Southern Refunding and Extension 4|'s, 1935. These bonds are a second mortgage on about 1,072 miles of road which are covered by the first lien of the Colorado & Southern First 4's. They are, however, a first mortgage on about $32,000,000 subsidiary bonds and stock. The market value of the collateral is considerably less than its par value and the real security of the bonds is their second mortgage lien. The issue is an open mortgage, however, and a portion of the bonds are reserved for improvements and to retire the first mortgage bonds when they fall due in 1929. Hence, it is possible to give the issue the name of "refunding and extension" mortgage rather than second mortgage. General Mortgage Issues General mortgage bonds have become a very common type of investment. This title has taken the place of the so-called "blanket mortgage." General mortgage bonds are a direct lien upon the property of a corporation, but are subject to earlier mortgages placed either upon certain sections or upon the entire property. General mortgage bonds are usually issued in amounts sufficiently large to take care of the underly- ing bonds at maturity. It can be readily seen that the asset value behind a first or second mortgage bond can be quickly figured from the value of the property. The investment value of a general mortgage bond, on the other hand, depends perhaps to a larger extent upon the net earning power of the property than to its mortgage position, because, particularly when the 18 I nv e s tmejit S e c n ritie s underlying liens are of large amount, the general mortgage issue may be quite far removed from the property. The Chesa- peake & Ohio General Mortgage 4|'s, 1992, are a typical issue. This bond is secured by a direct mortgage on about 1,480 miles of road. It is a first lien, however, on only 426 miles. It is a second mortgage on 802 miles, which mileage is covered by the prior lien of the First Consolidated 5's. It is a third lien on 252 miles. In all, it is subject to $42,560,000 prior liens. Earn- ing power of the property is improving constantly, and the bonds have a high rating. Refunding Mortgages Refunding mortgage bonds, in the strict sense of the term, are bonds which have been issued to take the place of other bonds falling due which it has been felt desirable to extend rather than pay off. So far as security goes, the words "refund- ing mortgage" mean little. Such an issue should be examined carefully. For example, a first and refunding mortgage bond may be a first mortgage on only one-tenth of the entire property and may be a second, third, fourth or even fifth on the balance, or it may be a first mortgage on nearly all of it, like the Rubber bond. One of the well-known refunding mortgage bonds is the Chicago, Rock Island and Pacific Railroad First and Refunding 4's, 1934. This bond is secured by a direct or collateral mort- gage on over 5,834 miles of road. It is, however, a direct first mortgage on only 815 miles. It is a first collateral lien on 365 miles, through the deposit of bonds and stocks of subsidiaries. Its real security is a second lien on 4,270 miles covered by the first lien of the General 4's, 1998. In all, this bond is subject to nearly $75,000,000 prior liens. Consolidated Mortgages A consolidated mortgage bond is theoretically a bond secured by a mortgage on the entire property of a company which is the result of a consolidation of numerous smaller properties. Here again, it may be seen that the words "consolidated mort- gage" of themselves mean little or nothing, as regards security. Different Types of Investment Bonds 19 A consolidated mortgage may be a first mortgage bond on the consolidated property or it may be a second or third mortgage. Of late years, consolidated mortgage bonds have been created to refund or retire other issues which are prior to it, but which are not yet due, in an endeavor to consolidate the indebtedness of the company. Here again, it is of course necessary to study into the actual security behind the issue. Prior Lien Bonds Merit Study Prior lien is a descriptive title that is much misused. If prior lien bonds were exactly what their name indicates, they would be prior in lien, or ahead of, all other indebtedness against the property. As a matter of fact, prior lien bonds are often issued in cases where, while they become prior in lien to certain issues, they are, at the same time, subject to other issues out- standing. The latter remain prior in lien, or ahead of actual prior lien mortgage bonds. A good illustration of this is the mortgage bonds issued in the St. Louis-San Francisco reorgan- ization. This company has at the present time nearly $120,- 000,000 bonds outstanding under its prior lien mortgage. These bonds are subject to approximately $14,000,000 other issues. In turn, they are actually prior in lien to Adjustment 6's, 1955, and Income 6's, 1960. While a mortgage on about 4,000 miles of road, they are a straight first mortgage lien on only 1,530. Closed and Open Mortgages We have spoken in the above description of open and closed mortgages. Open mortgages are to be found to a large extent in general or secondary mortgage issues. An open mortgage is a mortgage under which more indebtedness can be incurred, or in other words, under which the amount of indebtedness authorized has not yet been reached. A closed mortgage is the opposite. No further bonds can be issued under that mort- gage. It can readily be seen from this that a closed first mortgage forms an extremely high type of investment. On the other hand, an open, general mortgage, while it may possess a high 20 I nv e s tment S ecuriti e s degree of security, has many drawbacks. No better illustration of this can be given than recent developments under the Penn- sylvania General Mortgage. This mortgage is open for large further issues of securities and has been for some time. In April, 1917, $125,000,000 General Mortgage 4|'s were sold to the public on a 4.70% basis. In December, 1918, $50,000,000 General Mortgage 5's were offered on a 5.10% basis. In May, 1920, $50,000,000 General Mortgage 7's were sold at par. The result of this continued issuing of securities under the same mortgage and under difficult conditions has, of course, reacted unfavorably against bonds previously outstanding under the same mortgage. Classification According to Maturity The varying needs of our corporations have caused the issuance of various types of securities according to their date of repayment. For example, some corporations desire to borrow money for only a few years believing that the growth of the business will allow repayment in a short period and a saving of interest. Other corporations financing permanent investments like our railroads, desire to obtain money for as long a term of years as possible, when money can be obtained under favorable conditions. Some corporations, believing in the future growth of the business, but not willing to incur the obligation for re- payment definitely in the near future, equip their bond issues with sinking funds which retire them gradually. Others equip them with redemption features which allow the repurchase of the bond by the corporation from investors, if favorable con- ditions make such repurchase seem advisable. Long Term Bonds Long term bonds usually run from 25 to 100 years. As stated above we fmd long term bonds issued by corporations when conditions are favorable to borrowing money at a low rate of interest. For example, the New York Central has approximately $350,000,000 3|% and 4% bonds outstanding Different Types of 1 7i vestment Bonds 21 which are not due for about 75 years, on which it is paying a very low interest rate and which were originally sold to investors at about par. Long term bonds should only be purchased under conditions like those now prevailing, that is when com- modity prices and interest rates are high. Under such condi- tions, few new long term bonds come into the market and the prices of those outstanding are very low. This situation will be treated in detail, in a subsequent chapter. Short Term Notes Short term notes are issued under directly opposite conditions. They are put out when money is high because the issuing cor- poration does not care to pay prevailing rates for money for any longer time than necessary. Therefore, it endeavors to make the maturity of its short term note fall at a time when refinancing conditions will be more favorable. If this is the true attitude for a corporation, it is not to the interest of the average investor to purchase short term notes when commodity prices or money rates are high as he will be faced with the necessity of reinvesting at maturity to less advantage. He should buy long term bonds at low prices and obtain permanent high returns. Under conditions like those prevailing in post-war periods we can see why large issues of short term notes are put out by cor- porations. Perpetual bonds are few and far between in this country. British Consuls and French Rentes are types of perpetual bonds. They are just what the name signifies — ■ certificates of indebted- ness bearing a fixed interest but without definite maturity. Serial and Sinking Fund Bonds Serial bonds are bonds that are payable in installments. Serial issues are largely confined to municipal bonds. Serial bonds may be issued in anticipation of conditions in the future which will allow repayment of a stipulated portion of the prin- cipal year after year. The serial nature of a bond takes the place of a sinking fund. 22 Investment Securities Sinking fund bonds are bonds carrying a stipulation that the corporation agrees to set aside certain sums, at stated in- tervals, which will provide for the gradual repayment of all or part of the principal of the indebtedness. Sinking funds may be used in various ways. The corporation may be empowered to purchase bonds in the open market up to a certain amount and at a price not exceeding a certain figure. On the other hand, a stipulated price may be mentioned at which the bonds will be called in certain amounts annually. For exam.ple, the United States Steel Sinking Fund 5's, 1963, contain a provision for the calling in of a stipulated amount of the bonds yearly at 110. Bonds so retired are kept alive, that is the company continues to pay interest on them into its own sinking fund. As a result, it may be figured out that, before maturity of the bonds, the entire issue will be called in at 110. This forms a situation very favorable to bondholders. Redeemable bonds are sometimes known as callable bonds. They are distinguished from bonds having a sinking fund in that no particular annual sum is set aside in preparation for re- demption. Many times certain conditions are stipulated under which bonds may be redeemed, but, broadly speaking, redeem- able bonds may be said to be issues on which the issuer has in- dicated the right to pay his security off previous to its actual date of maturity. Redemption figures in the majority of in- stances range above the face value of the bond. Convertible Bonds Convertible bonds have become a widely used method of financing. They are bonds which, at the option of the holder, under certain conditions, are convertible into other securities, either bonds or stocks, issued usually by the same corporation. Convertible bonds may be put out by a corporation for numer- ous reasons. When bonds are issued that are convertible into stock, it is usually with the idea that the development of the company in years to come will bring an earning power that will make the stock so attractive that the conversion privilege will Different Types of Investment Bonds 23 be taken advantage of by investors. The gain to the company is in eliminating a fixed interest charge. An interesting illus- tration is the Chesapeake & Ohio Convertible 5's, 1946. These bonds were convertible into the stock up to April, 1920, at $75 a share. From April, 1920, to April, 1923, they are con- vertible at $80 a share. Chesapeake & Ohio stock in early 1922, was paying $4 a share and selling between 50 and 60. The road was making progress, and it was entirely possible that the divi- dend in years to come might be increased. If this was done, it will readily be seen that the stock would become an attractive exchange for the bonds. Convertible notes as well as bonds are sometimes issued. The idea, often, is that it would be well for the corporation to have holders of its short term obligations change into long term bonds, when conditions for the holding of long term bonds from the corporation's standpoint are more attractive than those prevailing at the time of sale of short term notes. Under such conditions, of course, the price at which the notes are con- vertible into long term bonds is a figure considerably above the selling levels for the long term securities at the time the short term notes were offered. The attractive feature of convertible bonds from the investment standpoint is that during periods of lax business or depression the holder of indebtedness of a corporation is in a much stronger position than the stockholder. At the same time, the convertible bondholder, thus protected, is bound to profit through the conversion privilege in any extra- ordinary prosperity that may accrue to stockholders during a boom period. Coupon and Registered Bonds We feel that before leaving this descriptive chapter, brief remarks should be made on coupon bonds and registered bonds. Coupon bonds have certificates attached calling for stipulated interest payments. These certificates must be presented for payment when the interest becomes due. Such certificates are made payable to the bearer as well as the principal of the 24 Investment Securities bond itself. Registered bonds, on the other hand, are of two forms. They may be registered as to principal and interest, or registered as to principal alone. A registered bond is similar to a stock certificate. It has the name of the owner filled in on the face and cannot be transferred from one person to another without endorsement. A bond registered as regards principal and interest bears no interest coupons. The interest is mailed to the bondholder directly as it matures, in the form of a check. The principal of the bond is collected by endorsement on the back. If a bond, however, is registered as to principal only, the coupons are attached as in the coupon bond, but the ownership of the bond cannot be transferred except by endorsement. The argument for registration of bonds is, of course, safety. They are not negotiable without endorsement. The marketability of the registered bond is not nearly so good as that of coupon bond as much inconvenience to holder and purchaser is caused by registration. CHAPTER III FACTORS AFFECTING BOND PRICES The Initial Consideration in Investments Safety and return are the initial considerations of all in- vestments. Safety is the starting point. After safety is es- tablished further energies are expended in obtaining as high a return as is possible while maintaining a good degree of security. Security or safety is not, however, a fixed item. A widow, absolutely dependent upon income received from her invest- ments, requires a wide margin of safety. In other words a degree of stability must be assured which will prevent any material change in underlying conditions over a series of years. Such investors require absolute first mortgage bonds of prop- erties, the value of which is many times the mortgage outstanding against them. An investment of that type, while high in safety, is low in return. A business man, a young man, looks in a different direction. With him a study of safety becomes one of degree. Too much security costs money. It brings a material loss in income. A business man's investment must have elements that insure constant improvement but it is not necessary that in the im- mediate future it should have such a tremendous amount of assets behind it that its security may be termed super-excellent. Therefore, in such investments a most careful study of the present and future governing forces is necessary. In any investment we must first assure ourselves of a degree of safety sufficient to give continued interest payments. Other- wise we change from investment to speculation. With such assurance as a basis further energies should be expended toward acquiring the investment that gives us the highest return with the best outlook for future improvement. 26 Investment Securities Two Types of Influencing Factors Given an assurance of continued interest payments and probability of constant improvement in conditions within the property, what then are the factors that affect the prices of such investment securities? If the earnings of the property are sufficient and continue sufficient to insure interest payments, it is not the month to month or even year to year fluctuations in net earning power that concerns us. What is it? There are two types of conditions that affect the price levels of investment securities. The first type are those of long duration or what may be termed PERMANENT FACTORS. The second type are those that fluctuate at relatively short intervals, changing from year to year, or at least e\'ery few years. These may be termed TEMPORARY FACTORS. Permanent Factors In taking up the factors that influence bond prices over a long term of years, we must first remember the primary point — investments are made for the income that they give. In- vestment bonds are receipts for money loaned which the bor- rower agrees to return at a certain specified date in the future. As a result bonds are to a large measure simply money. We know well from a study of economics that money is valuable only for what it will buy. When we speak of prices doubling we mean that the amount of goods that a dollar will buy has been cut in half. Another way of saying the same thing is that the dollar is only worth fifty cents. Likewise investments, giving a stipulated return uninterruptedly over a series of years, depend for their market value on what the income received from them will buy. In other words they fluctuate with the trend of commodity prices. When commodity prices rise the purchasing power of the income from an investment declines. Commodity prices, therefore, are one of the foremost permanent factors affecting prices of investment securities. Investors in this country are largely people of means. We have not yet reached the position of the French people where Factors Affecting Bond Prices 27 the relatively poor man purchases investment securities in small lots. Thrift, as such, has not yet become a national habit in the United States. It can be readily seen, therefore, that the demand for investment securities depends to a considerable extent upon the prosperity of the so-called capitalistic element in this country, and the manner in which they use their profits. Still another factor that is permanently affecting the values of investment securities is the increase or decrease in our efh- ciency in production. Such increase or decrease either widens or narrows the margin of profits and also widens or narrows the increase in material wealth of the country. Commodity Prices When commodity prices, or the prices of all goods, are high, as at the present time, we are all aware that the purchasing power of the dollar is low. In other words, we can buy less goods for the same amount of dollars than we could ten years ago. Similarly, a $50 income on a $1,000 investment buys only about one-half as many goods as it did in the pre-war period. It is not possible to get investors to loan $1,000 today and be satisfied with an annual income of $40. With the big increase in living costs it has been necessary for them to demand a considerable increase in the annual return on their money. As a result, it follows that a constant increase in commodity prices means a constant decline in the prices of investment securities or conversely a constant increase in the return received from them. No better illustration of this situation need be given than that of the West Shore First 4's, 2361. In 1902 these bonds sold at 116, at which level the yield was only 3%. Commodity prices were then very low. The dollar would buy a great deal and a $30 a year return on a $1,000 investment allowed a com- fortable existence. The West Shore First 4's in 1920 sold around 65 to give an annual return of 6%. The return had doubled. Similarly the prices of goods that we purchase had doubled, or perhaps trebled in some instances. It is clear, therefore, that a primary factor in the price trend of investment securities is the fluctuations in the prices of goods. 28 Investment Securities What of the future? Study shows that after post-war in- flationary periods Hke the one just passed, we enter a period of prolonged decline for goods prices. We know that we can look forward at the present time to the future with the confidence that prices of goods will tend lower. As a result the prices of investment securities will constantly tend higher. As goods prices decline and the purchasing power of the dollar increases the return offered to new investors will also decline. Hence, an unfortunate situation, from the standpoint of living costs, has meant in reality an opportunity of a lifetime for investors. Spending vs. Saving A factor that is bound to have a profound influence on the price level of investment securities is the situation in a nation in regard to spending or sa^'ing. We have had a most apt illus- tration of this situation right here in the post-war period. We have been through a period of extravagant expenditure. Such periods usually follow upheavals like wars. Nevertheless, such spending naturally reduces saving ability to the minimum. There are only two ways in which we may use money. We can put it into immediate consumption or we can invest it. For this reason, there is bound to be constant competition be- tvveen objects for consumption and objects for investment. The former usually win out during periods of prolonged pros- perity. Business has been good; failures few and far between, and profits have been expanding. As a result, individuals have become care-free and look toward the future in a desire for personal self-satisfaction. Coincident with this development comes a natural increase in the prices for goods as the demand converges on goods rather than investments. Therefore, towards the end of a period of j^rosperity we see prices advancing rapidly and spending increasing, both of which have a very un- favorable effect on the prices of investment securities, the first through a decreased purchasing power of the dollar and the second through a diversion of demand. On the other hand, let us see what happens in a period of depression. A depression is usually preceded by a panic or Factors Affecting Bond Prices 29 crisis. Many firms and individuals fail. The world has ceased to look rosy and as a result the minds of individuals turn toward safety and serious thoughts in regard to what the future holds forth. Under such conditions, the abnormal demand for goods for current consumption declines abruptly. Prices follow. Gradually, as competition for business increases, and profits narrow as a result of that factor and lower prices, minds turn to security first of all. The result is a concerted saving and resulting demand for investment securities. For this reason we find the prices of high-grade investment issues advancing when general business is depressed and speculative securities lifeless or declining. Efficiency in Production Still another development that exerts a considerable in- fluence on the long time price level of investment securities is "efficiency in production." The reason for this is that an in- creavse or decrease in the efficiency of production raises or lowers the excess of production of new wealth. This naturally widens or narrows investment purchasing power. Industrial develop- ment of the past thirty years and the increased productivity of labor has certainly resulted in increasing the surplus wealth which remains in the hands of business enterprisers. This has been done largely through the development of labor-saving machinery and through the formation of efficient industrial establishments as the Ford Motor Company. Here raw labor has evolved into a sort of semi-skilled technique. Some may say — if this condition has developed under the tremendous improved technique of American industry in the last fifteen years, why has there not developed a very broad demand for investments from business enterprisers that would have offset the declining tendency that has prevailed in investments? The answer is that this factor is not as powerful as the factor of commodity prices. Furthermore, at least for the time being, the increase in surplus wealth has been used in spending for current needs rather than for investing. It can be readily 30 Investment Securities appreciated, for example, that if many of our successful business men had devoted their surplus earnings of the past five years to purchasing bonds rather than automobiles or jewelry, the depression of 1920-21 would have been less drastic. Forecasting Long Term Developments The question then before the prospective investor is two- fold. Under what conditions are we standing and how is it possible to forecast the future ebb and flow of developments underlying bond prices? We have recently experienced one of the most favorable investment opportunities that has ever been seen. The combination of tremendously high commodity prices, coupled with an era of extravagant spending, made it necessary for everyone to obtain an abnormally high income, and invest- ment securities were on a very low level. What of the future? Fortunately the ebb and flow, so-called, of the permanent factors above mentioned, does not come and go with rapidity. The broad fluctuations in commodity prices in this country over the last hundred years have occurred in periods of from 20 to 25 years duration. For example, from the beginning of the Spanish War and the birth of business combinations to 1920, commodity prices have tended upward. Prior to 1906 the advance was very slow. In the next six years it was very rapid. The rapidity of the advance denoted its culmination. A study of previous post-war conditions and the extent of the recent period of rising prices denotes that the turn of the post-war period of inflation is permanent. Over a period of years wc should see a period of gradual but persistent readjustment in whicli commodity prices will slowly but steadily decline. Similarly, past history shows tiiat periods of reckless spend- ing are in turn followed by periods of what may be termed ex- treme conservatism. The average man spends freely only as long as the future looks bright. Having entered a drastic readjustment period we can rest assurcfl tliat after the first ill effects are passed over and we are well in an era of depression Factors Affecting Bond Prices 31 the desire for spending will be replaced quickly by a desire for conservation and a steady return on the principal owned. The third factor is that of increased efficiency and produc- tion. We can look forward to a constant increase in this factor in this country with more than expectation. Post-war eras in this nation have always brought out new inventions. In the years to come developments should be along the lines of a more thorough knowledge and utilization of the human being. It has been found that by better thought-out and scientifically planned treatment the average individual production can be increased tremendously. The last twenty years has witnessed a large increase in productive facilities through improved machin- ery. The next twenty years should see it through improved human beings. Temporary Factors Affecting Bond Prices Changes in the temporary factors affecting bond prices naturally occur more frequently and at shorter intervals than do the permanent factors mentioned above. The factor of most immediate influence in bond values is the current interest rate. Under normal conditions interest rates have a seasonal fluctuation. Money is usually easy during February and again in the summer months. Naturally at such periods one would expect to find the bond market improving somewhat. As a matter of fact the bond market usually does improve during the months of May, June, and July. The February improve- ment is not so marked because in spite of high interest rates in January there is a demand for investment securities on account of the reinvestment of January funds which tends to sustain prices. Such movements, however, concern the average in- vestor only slightly and there are often times when an extreme movement in interest rates either one way or the other, which is known to be temporary, has little or no effect on the prices of investment securities. Prosperity and Depression The broad trend of the prices of investment securities is not 32 I nv e stm ent S ecurities interrupted by minor periods of prosperity or depression be- cause, as explained before, investment securities properly chosen give an uninterrupted income and are therefore not particularly affected by either an advance or decline in earnings. On the other hand, periods of prosperity and depression do have a temporary effect on the prices of investment securities because of their relation to the entire security holdings of an individual. During a panic, for example, bonds sometimes decline because, in an endeavor to protect the equity in speculative securities, an individual may be forced to sacrifice his investment holdings. As a result, temporarily, the excess of offerings over bids causes a drop. Shortly, however, lower commodity prices and a change from an orgy of spending to careful saving right the situation. On this account, bonds always recover quickly from any so- called panic or crisis. During a period of prosperity, bonds are the first security to weaken and give signs of the approach of the end. This is readily explained when the relation of bonds to interest rates is considered. The end of any period of prosperity comes because the persistent expansion in business gradually uses up the supply of available capital. As this condition develops interest rates advance rapidly. Bond prices react because they feel acutely any change in interest rates and commodity prices, which in turn lower the purchasing power of the income received. Effect of Taxation on Investments We have given taxation an individual position. Up to a comparatively few years ago it was a factor having little efifect on bond prices. With the developments of the war period, however, it has become a permanent factor affecting bond values. The result of direct or indirect taxation is to increase the average return on investments or in other words to lower the price of old issues. The reason for this, of course, is that a certain portion of the income, either directly or indirectly has to be forfeited. The natural action of any investor is to en- large his income so that the portion remaining will give him the Factors Affecting Bond Prices Z3 «5 Q o o u H u w < W H < Pi X < W o u 2; o B "•^ g -g a; - o n J2 o Ji c a. o u «j y ^' rt "^ O tn b ,_^ S (fl o 2 in a a - :« o &" a o 00 oi o . > o" >< 'm > -O S o o ™ T -' P tn 5 ^ ON 2 ^ n c c o .« o c ^„ -P ^-H -l-> .ill ro ^ 1= 1^ 0) o > c So .H2 < .52 - -T3 SS bfl rt p «3 9 Si -c fcp ^ S iS o 03 -G > ■ ' P ;^ _aj P in o •- t-^o6o6o6coo\oiONOo^(NT^iot>Ioi*HTj!u^ V* f*5lOt>»OCNlOr^i-(Tt*tHOOINr^CNO<^"^(N voior^i>^t-^t^o6o6coo'o*HCNro>oOodo^ \^ ■^\ooo»H(>jiot^^fOO\i^\ot^OfOO\a\ooio ■^ >dvo>dt-It^t^i^o6o6o6o\o«f^'tu^t-^o^o ^ 00O»OO»vO'^rciOI^C>CMO*lNO»O00a\t^'^ ^ OO»^00iO-"Ov0STHOO(N'.Hrc(^00^O>O ►A ioOM2iOOOt^r-^t~^o6o6oNO-HfO-^oo6o6 lO ,^ ^H -^ ^H ^H T-H ^H Q cs»-iiot^rD00iC^>o^r^\OO\0OOvf0-^iO ^ iqcOON^COlOt^OCSOO'tCNCNfO'OOOOCVlOO lO lOlOlO vO^d vO^d t^t^ t^ 00 0^ O 'H IN PO >o t^ W O^ ■^CSir)"O"lOCSO\00cvi»OOO\O000\'^00\O \» fOl^>O00ptN'*>O00-^p00>O00 00-HC50r»>O\ ^ lO lO lO lO \d ^O O O id r-^ 00 00 On O ^ (^ -^ o o vOf^iOiOOfNOO^CSr^p^rooOrOLOOiOfNt ^ OCNfOlot^QiOfOlOOlOf'l.-ICNCN^O'OO ^ uo lO to U^IO lO d MD O t-^ t^ 00 On O -^ CN ^ lO id ^ OOrJ^iOiOOOOi'^OiiO'^Or^t^iOfO^^OOiOOO w t^ONOCSf^iOt-.ON^iOCNOOvOiOlOOOtNiO^ ^ ■^■^»oioioioto»ovdvdi^t^o6oNO^f0^to giir)vO^vOiO»-iW5O'O00>HioOiO'HO0M3i ^ '*>Ot--o\pcs'^'Ooocst^-*rtpOrtiot^r-i Tjl "^ ^ -^ Tin lO u^ IT) lO lO id *d t^ 00 On O ^H IS fO '^ J55 Ni^ fOr^l^c^f^^p^f^t^r^fOoOriiioiDiN'^r^O \^ ONO^HfO^O[^ONO^Oi'^»-i's differ only to the extent that the issue of Octo- ber 24th is tax exempt as to the interest on not to exceed $30,000 bonds regardless of one's subscription to the Fourth Loan, whereas the issue of May 9th is tax exempt as to the interest on not to exceed $45,000 bonds in connection with one's subscription to the Fourth Loan. -66 1 71 vestment Securities The Market Action of Liberty Bonds The majority of us holding Liberty Bonds subscribed for them. The more fortunate have been able to purchase on declines, but many hold the ones originally purchased at par. Naturally the decline of 1919-1920 was disturbing. A brief discussion of the causes should be interesting. To begin with, it must be remembered that, even at the beginning of the war, the government did not attempt to borrow at the going rate of interest. The first issue, the non- taxable 3|'s undoubtedly approximately reflected the credit of the government on a non-taxable basis. A 4% bond at par, taxable to a great extent, as the First 4% issue was, was in no wise a true reflection of credit conditions. Patriotism played a large part in the sale of this loan and continued to play a large part in future loans. The progressive increase to 4j% and then 4f % for a short term note did not reflect the increasing interest rates in other securities. At the end of the war, many who had purchased government bonds wrongly felt that their obligation had ceased, and liqui- dated. This was followed by a period of inflation, in which a great many people thought a good deal more of spending than saving, and changed their Liberty bonds into hats, suits or phonographs. In addition to these conditions, the Federal Reserve Banks had, during the war, given all the assistance possible to the government in aiding the distribution of its bonds. It had purposely kept its rediscount rates at a level equivalent to, or below, the rates on government issues. Many will remember the slogan "Borrow and Buy." Subsequent events questioned the wisdom of that advice. At any rate, the end of the war found a tremendous amount of government bonds lodged in the Federal Reserve Banks, which bonds had been used for rediscount purposes — that is people had taken the bonds to the banks and had borrowed on them, the banks in turn re-borrowing with the Federal Reserve System. G ov er nmen t B nd s 67 When the ckingerousness of the inflation that took place in 1919 was appreciated, the Federal Reserve Board successively raised its rediscount rate. Cheap credit, meaning easy borrow- ing, lends itself to an enlarged purchasing, competitive bidding for goods, and thus inflation. A progressive increase in interest rates, or making credit difficult to obtain, has the opposite efi"ect. It makes expansion difficult and brings about deflation. This was what was necessary and what the Reserve Board was working for, but in doing it, it naturally brought about widespread liquidation of Liberty Bonds as the cost of borrowing on them became almost prohibiti\'e. The difficulties of people who had borrowed, however, brought a tremendous oppor- tunity for people with ready cash. The Future As noted above, the change from inflation in this country to deflation took place in the winter of 1919-20. Over a series of years, we can undoubtedh^ look forward to lower commodity prices, which will, in turn, bring low'er interest rates. With the high credit of the United States Government, the holders of Liberty Bonds were the first to feel the favorable effects from such developments. It is not too much to expect that within a comparatively short time, the price of Liberty 4|'s will go above par. With our present wealth, income and debt, a credit basis of 4% for the United States Government under normal investment conditions is entirely probable. The opportunity offered and probable future of United States Government bonds can be appreciated by considering the trend of British Consols in the years following the Napoleonic Wars. The position of Great Britain at that time was nowhere near as strong as ours today. British consols were not helped by an approaching maturity. Nevertheless, they advanced approximately 30% in value in a comparatively few years. We feel, therefore, that the expectation of similar developments in United States bonds is not at all over-optimistic. 68 Investment Securities Position of Foreign Governments With the tremendous financing of the Great War, the question of foreign investments has become of prime importance to the United States investor. The broadening of our investment field is bound to be of distinct benefit to the nation. As holders of European securities, we would yearly receive large interest payments, thus automatically swinging the exchange situation in our favor. Nevertheless, such investments must be considered and approached purely from the business standpoint, and are of no value if not sound. Any investment pre-supposes a degree of safety sufficient to give uninterrupted income over a series of years. A consideration of an investment in European Govern- ment bonds must be based on the same grounds. We wish, therefore, to discuss the position of the foreign nations particu- larly as compared with our own position and to a lesser degree as compared with each other. As the values behind government obligations consists of the united support of the people, as we have shown, and as this good will and support is closely bound up with the wealth, debt and income of the nation, let us consider briefly these conditions. Wealth and Income — a Comparison The table shown on the opposite page serves to give this information in a graphic form. We have reduced the debt in all cases to a per capita basis. This gives a real comparison. The actual debt of the nations is, of course, changing constantly, but the figures given, based on conditions late in 1919, are valuable for comparative purposes. It goes without saying that the situation of the United States is sounder than that of any other nation, from every standpoint. Perhaps the outstanding feature of the table is the situation of France. Its debt per capita exceeds that of the two Central Empires. While its debt is not as large a percentage of its national wealth as is that of Great Britain, Italy or Austria, Government Bonds 69 the per cent of debt charges to national income, which is really more important, is the largest of any nation. PUBLIC DEBTS OF VARIOUS NATIONS Debt Debt Debt Debt charges charges per capita per capita per capita per capita pre-war recently pre-war recently United States $11.33 $249. s$0.22 $8.40 Great Britain 75.03 820. 2.60 31.00 France 166. 770. 6.35 49.00 Italy 82.55 410. 2.80 15.75 Belgium 94.25 250. 3.25 11.15 Germany 17.20 600. 0.62 33. Austria 85. 555. 3.25 20.50 Debt as Debt as Debt charges Debt charges % of nat. % of nat. as % of as % of wealth wealth nat. income nat. income pre-war recently pre-war recently United States 0.60 13. 0.07 2.55 Great Britain 5.00 54.15 1.10 13.. France 11.30 53. 4.20 32.50 Italy 13.30 66. 2.60 15. Belgium 4.30 12.60 1.92 6.55 Germany 1.45 50. 0.40 21. Austria 11.20 73. 4.20 26. Note: In the past three years, conditions in all these nations have grown worse, with the exception of Great Britain. Belgium has not suffered severely compared with the other Allies. Her recent debt per capita, of $250 is practically the same as the per capita of the United States it will be noticed. Of course, the cost of carrying her debt is heavier than that of the United States, which is shown by comparing "Debt charges per capita," but this figure is still very favorable. When we come to national wealth and national income, Belgium suffers, failing to have as many natural resources as other nations. The result is that the per cent of debt charges to the national income of the country rises above 6|% as com- pared with 2|% for the United States, but Belgium's necessity for using 6.55 cents out of every dollar to pay the interest on her debt is still low as compared with other European nations. 70 I nv e s tni 6 71 1 S ec u ri tie s Methods of Obtaining Income Having established the position of the different countries in 1919, as regards percentage of debt charges to national income, it seems to us that the next interesting consideration should be their relative financial sagacity. We know of no better way to judge this question than by the methods used by the different nations in meeting their war expenditures. Increasing taxation is not easy for any nation, and a lazy financial method would have been to raise as large a portion of the money needed as possible by patriotic loans. The table below will show what the various nations accomplished during the war period. PERCENTAGE OF TOTAL WAR EXPENDITURES OBTAINED BY TAXATION United States 26% Great Britain 25 France 153^ Italy 15 Germany 11 (Figures for Belgium are not available.) Germany was notorious for her extreme dependence upon loans for war expenditures, which was based on the expectation of an early victory. It proved to be a course which, entered upon, could not be discarded. The failure of France and Italy on the other hand, to do better, can be considered in some degree an indictment of both nations. If it was felt by the Ministers of Finance that the people could not or would not stand any heavier taxes, that of itself is not a bull argument on the securities of the nation. At any rate, the failure of the Ministers to do better is one of the reasons why France and Italy are in the weakest position of all the Allies. Expansion of Note Issues In all nations, the outstanding currency has been increased tremendously as a result of war conditions. Among European Government Bo 71 ds 71 nations, this inflation in many quarters has reached alarming proportions. The position of various countries late in 1919 as compared with pre-war conditions is given in the table below. The figures show the note circulation per capita just prior to the war and late in 1919, also the ratio of reserves to liabilities in the various central banking systems. Pre-war note 1919 note Pre-war Recent circulation circulation ratio of ratio of per capita per capita reserves reserves. United States $6.70 $32 98.5% 45% Great Britain 4.84 51 40 20 France 32.49 172.40 60 15 Italy 14.11 74 62 9 Belgium 24.29 115.17 Germany 7.93 150 60 2.50 Austria Hungary 6.25 165 72 0.50 Note: In every one of these nations, except Great Britain, note circula- tion has continued to grow.- — ^January, 1923. Here again, we are forced to call attention to the position of both Italy and France. The expansion in the note circulation of Italy has been rapid, but the note circulation per capita of France at the present time is tremendous. In depreciated currency, the Central Empires are practically hopeless. When we consider that the ratio of reserves in the central banking institutions of Germany have declined from 60% to a little over 2%, and in Austria Hungary from 72% to- about one-half of one per cent, the situation is plain. This table readily makes clear the reason for the German mark selling where it does and for the Austrian krone being prac- tically worthless. We see little hope for improvement and nothing in the situation on which to base bullish speculation. Irrespective of business conditions, the constant outpouring of new notes in these countries prevents any monetary improve- ment. Here again the position of Belgium and Great Britain standi out as much more favorable. 72 Investment Securities Domestic Securities Preferable In addition to the high rates paid by the foreign govern- ments for money, American investors are often approached with the argument that, owing to the great depreciation in foreign exchanges, considerable profit as well as a high return will accrue when the exchange returns to normal. The figures given above as regards note circulation in France and Italy as well as in the Central Powers show that the return of the cur- rency of those countries to normal will be very difficult to bring about. It will be years before it eventuates and in some cases such a development at all is extremely questionable. On the other hand, American long-term bonds are now selling nearly as low as at any time in fifty years. A purchase of them will not only give a sustained return over a long period, but also considerable appreciation in price. For this reason, we feel that, outside of the high-grade English, Neutral European nation's, and Canadian bonds, investors should confine purchases to United States issues. CHAPTER IX MISCELLANEOUS ISSUES Municipal Bonds The term "Municipal" is used to apply to bond issues put by a city, state, county or township. Such bonds are obliga- tions of definite municipalities and the principal and interest is payable from taxes. The purpose of their issue is to finance improvements which are to be of general public benefit. In view of this, the position of municipal bonds is a strong one. The benefits derived from their sale is usually plainly visible and each improvement makes the general community more pro- gressive and of greater value. They are dependent for payment, not upon any individual conditions or industry, but upon a community that has benefited from their issuance. In other words, while in the last analysis, like government issues, they are dependent upon the good-will and integrity of the people, they, of themselves, further such good-will and contentment. Methods of Payment We have said that municipal bonds depend upon taxing power, or ultimately, the good-will of the people, for their pay- ment. There are, however, certain distinctions in municipal bonds, which should be pointed out. The majority are payable by the collection of taxes placed against all the assessed property of a community. Some are made payable from special taxes or from revenue derived from the improvement itself. In such a case, however, the municipality as a whole stands behind the issue and payment is thus assured even if the special work proves disappointing. Bonds of this type are those issued by municipalities for waterworks, or perhaps playground or agri- cultural works. Another type are payable from taxes simply 74 InvestmentSeciirities levied against the property benefited, in direct proportion to the benefits received. They are called Special Assessment Bonds. School, sidewalk or even road improvement bonds are often issued in this form. These bonds require a more thorough knowledge of local conditions, when considering purchase, than •do the direct municipal issues. Tax Position Municipal bonds are exempt from the Federal income taxes. In addition they are exempt from State taxation in the state in which they are issued. For example a Massachusetts investor can hold Massachusetts municipals exempt from both Federal and State taxation. Recently, considerable agitation has arisen against this tax exemption. In view of the fact that the general com- munity benefits from the improvements against which bonds are issued, it is probable that municipalities will continue to Public Indst. Indst. Year Municipals Rails Utilities Bonds Pfds. 1920 5.07% 6.88% 7.51% 7.56% 7.82% 1919 4.62 5.96 6.30 6.57 7.25 1918 4.54 5.79 5.66 6.46 7.19 1917 4.22 5.10 4.91 5.97 6.98 1916 3.97 4.75 4.46 5.26 4.48 1915 4.35 4.89 4.81 5.57 6.83 1914 4.28 4.92 5.01 5.96 6.88 1913 4.30 4.41 4.90 5.35 6.42 1912 4.15 4.26 4.80 5.18 6.16 1911 4.06 4.23 4.77 5.17 6.25 1910 4.00 4.21 4.79 5.25 6.23 1909 3.90 4.08 4.71 5.16 6.13 1908 3.82 4.35 5.11 5.90 7.09 1907 3.90 4.30 4.91 ' 5.76 6.97 1906 3.60 4.01 4.56 5.18 6.32 1905 3.40 3.91 4.43 5.19 6.34 1904 3.35 4.05 4.60 5.81 7.33 1903 3.31 4.10 4.63 5.69 7.27 The increase in the return to be obtained from municipal securities in the last seventeen years has been 1.76%, or an increase of 53.33% over the •return then available. Miscellaneous Issues 75 have the advantage over private corporations in obtaining funds. Moreover, in event of new legislation on this subject the issues now outstanding would not be affected. As a matter of fact, the elimination of the tax free feature, would make the old issues more valuable. The foregoing short table gives the in- creasing returns to be obtained from municipal issues over a series of years and shows how attractive they have recently been to wealthy investors desiring non-taxable investments. Real Estate Bonds "Real Estate Bonds" as they are known, are series of bonds issued by a mortgage company formed for that purpose. They are secured by mortgages on real estate. They really do not differ from an ordinary mortgage transaction. There are a large number of companies engaged in this business in this country. The strong feature of bonds of this type is the stability of or constant increase in the values behind them. Moreover the value of real estate to industry of all kinds assures a constant if not increasing return from its use. Elements of Risk It must not be be presumed, however, that on account of this stability of value and income, there is no risk attached to this type of investment. The risk lies, not in the question of real estate as an industry, but in such factors as the following: Changes in certain real estate values Depreciation Rental during depression periods Judgment in values It will be seen immediately that the questions given above apply rather to residential and business real estate than to farm land or buildings. These risks can, however, be carefully minimized. This is done by our strongest bond and mortgage companies. Changes in real estate values do not occur from a nation-wide standpoint, except a change toward higher values. Changes in local conditions can be minimized by scattering the investment. That is, in a series of bonds secured on real estate, 76 I nv e Sim en t S ecuriti e s the latter should be chosen from differing localities, where possible. If not possible, the bonds should be secured on real estate in various portions of the same city. Depreciation can be carefully allowed for and that this is done should be noted. Diversification will offset the question of rentals during de- pression. This means diversification of industry as well as locality. Judgment in valuing brings in the human equation. The investor can see that precautions have been taken to insure a judicial appraisal. Such care is scrupulously exercised by our large real estate bond houses. Advantages and Disadvantages Real estate bonds assure stability of price as well as income and value, if well chosen. They are usually issued for a short term. These factors make them a much sought after invest- ment by discerning investors during periods of advancing com- modity prices. The recurring maturities give the investor the opportunity to obtain the increasing returns that are bound to follow rising prices. On the other hand, an investment in real estate bonds is not so attractive during a period of declining commodity prices, as the desire of every investor in such a period should be to get into sound long term issues that give a high return. If this is done, not only will the investor receive a high return, but also appreciation in price. Unless bonds are of long maturity, this is not possible. Federal Farm Loan Bonds These bonds are real estate bonds with a fairly long maturity. While they are not an obligation of the United States Govern- ment, they have its backing. These bonds can only be first mortgages. The Federal Farm Loan system was formed in 1917, with an elaborate organization, to loan money to our farmers. The bonds, which have been offered to the public, are secured by loans made up to 50% of the appraised value of farm land and up to 20% of the permanent improvements. The uses to be made of these loans must be stated clearlv and ex- Miscellaneous Issues 77 treme care is used in making the appraisals. The bonds run for twenty years and are issued in denominations of $25. $50, $100, $500, and $1,000. Repayment of Loans The holders of these bonds are further protected by very stringent restrictions in regard to the repayment of the loans. Every mortgage contains an agreement that the borrower will repay on an amortization plan. He must pay an amount at least annually sufficient to cover interest charges and all expenses; also an amount sufficient to retire the total debt within an agreed period. This period cannot be less than five years nor more than forty. General Liability Another condition that is of great value to the prospective purchaser of these bonds is that not only is the Federal bank is- suing certain bonds liable for the payment of the interest and principal on those bonds but it is also liable for the bonds put out by other banks in the system. In other words, a joint liability exists. This security is in addition to the security of the mortgage itself. Tax Exemption Federal Farm Loan bonds are exempt from all Federal and state taxes, including income taxes. As in the case of municipal issues, although perhaps more pronounced, there has been con- siderable agitation recently against this tax exemption. It has been argued that the entire idea of the Federal Farm Loan System is wrong, that it is class legislation. The best legal opinion, however, has upheld the steps that have been taken. Bondholders have nothing to fear from such an agitation, because, as in the case of municipals, whatever is done in the future in regard to tax exemption can hardly affect outstanding issues. Federal Farm Loan bonds form one of the most attractive non-taxable investments available. CHAPTER X READING AN OFFERING CIRCULAR Position of Prospective Investor Buying investments that are listed on our large stock ex- changes, which have a fairly broad market, calls for analysis along the lines indicated in the foregoing chapters. Buying new offerings which are necessarily unseasoned and for informa- tion on which the investor must rely to a considerable extent on the offering circular, calls not only for analysis of that type, but a somewhat more detailed inquiry. It seems to us that in scrutinizing a new issue, investors should endeavor above all else to keep their viewpoint broad and not narrow it down simply to the statements or figures given in the offering circular. Moreover, analyzing an offering cir- cular is a procedure that really calls more for a strict common sense interpretation than for anything else. It must be re- membered, for example, that the issuing corporation stands in the position of submitting all possible arguments to influence the investor to loan his money, or become a limited partner in the enterprise, if it is a preferred stock, under the conditions stipulated in the circular. The mutual interest demands a high degree of security. It is, however, the natural desire of the corporation to obtain the money on as favorable terms as possible. The interest of the investor is to get as high a return as possible, at the same time obtaining a high degree of safety. To repeat a little, we will say, in illustration, tliat this is the reason why most bond offer- ings at the present time are of short term nature. Corporations do not wish to pay high rates for any longer time than is neces- sary. Under such conditions, investors often find old established seasoned issues that are far superior to any of the new offerings. Reading an Offering Circular 79 Nature of the Business In taking up an offering circular, it seems to us that the factor of immediate interest is the nature of the business transacted by the company offering its securities. The experiences of the past five years have shown that the investor, with a knowledge of the fundamentals, will gain by keeping the probable trend of interest rates and commodity prices fixed in his mind. Under changing conditions he makes a distinction between investments in railroads, public utilities and industrials. The investor im- mediately realizes that, under advancing commodity prices, for example, the public utility is bound to operate at a disadvantage compared with the industrial, so under such conditions he favors industrial investments, under declining prices — vice versa. The next consideration should be in regard to the essential or non-essential character of the business. Under this considera- tion would come a decision as regards the probable future. The difference betw^een the outlook of electric lighting, gas, electric power or street railway companies as a class, for example. If the offering was an industrial, the question would be one of luxury or staple industry. A still further consideration, under this heading, is that of the probable expansion of the business. Has it reached, is it approaching its saturation point, or does the prospective investor feel that the limits of expansion are far in the future? Location of the Enterprise Here again the factors to be considered differ among various types of enterprise. In a public utility, for example, the loca- tion of the enterprise as regards the cities served and the proba- bility of their future growth would be a factor of great impor- tance. Other factors would be the transportation facilities. If a steam power company, the proximity of hydro-electrics and other local conditions bearing on the costs of opera- tion. In an industrial the question of locality is more bound up with the question of the labor supply and the nearness of the market for the product. '80 Investment Securities Our country is now sufficiently de\'eloped so that with the exception of a few short line properties, the location of our railroads needs little study. There is one question in this field, however, that is coming to the front. That is the location of the property as regards growing motor truck competition. In considering new securities from the standpoint of location of the property, clients can profitably re-read Chapter Five in the text, "Launching a New Enterprise," which covers this factor from the standpoint of the issuing corporation. Capitalization This question is of more common nature in all classes of enterprise. In considering it, the first point is its nature or character. What proportion of the company's capitalization consists of stock? What of bonds? Here again we can refer clients to the text: "Launching a New Enterprise," Page 32, under the caption: "Determining the Corporation's Financial Structure." This shows particularly the relations that should be established between the bonds and preferred stocks of an issuing corporation and its total asset values, in order to keep them within conservative limits. Under a consideration of capitalization should come, we believe, the question of equity behind the present offering. It can be readily appreciated that, if the offering is a junior bond or preferred stock followed by a relatively small amount of common stock, such equity is not large. If, however, the offering is a first mortgage bond, followed by an equal or greater amount of j)referred and common stocks paying a good dividend, the stockholders equity in the property is valuable and is in turn an added security behind the bond. Purposes of tlie New Issue The next factor that should be scanned is the purpose for which the new bond or ])rcferred stock is put out. If it is for purposes of expansion, is it the opinion of the investor that ap- proaching conditions, as he views them, warrant expansion in Reading an Off er in g Circular 81 that particular type of industry? For example, at the present time, in view of the developments of the past ten years, no one would question the wisdom of expansion in our railroad facilities. On the other hand, if a luxury making industrial is offering a security for the purpose of obtaining funds to build additional plants, the wisdom of such a course after four or five years of extraordinary prosperity, is at least questionable. If the purpose of the issue is to replenish working capital, the degree of accomplishment should be studied with interest. That is, the investor should figure, from the balance sheet given, what the working capital position of the company was prior to receiving the money from the new issue. If its position was weak, it should be determined, if possible, why it was weakened, and whether the turning of liquid into fixed capital will be justi- fied by probable future developments. The investor should make up his mind, to his own satisfaction, that the renewed working capital would be sufficient to carry the company, as far as may be determined, without further issues of notes or pre- ferred stock in the immediate future. Amount of the New Issue The amount of the new issue to be sold should be studied in relation to the outstanding obligations. If a property is issuing bonds or preferred stock equivalent to its outstanding bonds or preferred stock, or if a company is placing an initial fixed charge against the property, the factors behind the new issue must be studied much more carefully than in the case of a company which is putting out bonds, we will say, equal to only about 25% of its present outstanding indebtedness. Whether the mortgage is open or closed should be considered. An open mortgage will doubtless mean further issues of the same type, which will, of course, tend to depress or at least restrain the price of the present issue until all the offerings become ab- sorbed and seasoned. Retirement features are another point of interest. If the retirement of the bonds is accomplished through a sinking fund 82 Investment Securities the investor can rest assured that his position will improve con- stantly as the sinking fund gradually retires the issue. If, however, the retirement is by calling as a whole which would take in all the issue at a slight premium above par, its value to the investor is more questionable. It is natural to suppose that the bonds or preferred stock will not be taken in at a pre- mium unless it is to the advantage of the company to do so. It will not be done unless the company is in a strong position. Under these conditions, investors, it can be conceived, might much prefer to continue the investment rather than lose it. Here again, the question of long term and short term se- curities comes up. In periods which forecast declining commod- ity prices offerings with a long time to run, without retirable features, are to be desired, given a high degree of security. Short term notes are to be desired under opposite conditions. Security In considering security, the mortgage or lien, if the offering is bonds, should be taken up first. Naturally the issue most desired is a straight first mortgage. For reasons which we have discussed, howe\xr, such issues are not obtainable in large quantities, particularly among our stronger corporations. In considering prior liens on a part or all of the property, they should be considered from the standpoint again of whether they are open or closed mortgages and what retirable sinking fund features they carry. It is, of course, clearly to the interests of the purchaser of a general or second mortgage bond to have the first mortgage issue carry either a sinking fund or the possibility of redemption. In the case of a preferred stock, a study of the security should consist to some degree, of a consideration of the value of the restrictions placed around it. In the last analysis, however, the preferred stockholder, being a partner in the enterprise, depends on the earnings for his security. Earnings In taking up the question of earnings, let us say that too many offering circulars simply give the latest earnings. This Reading an Offering Circular 83 is a mistake, as it is impossible to get a line on any corporation from a study of a single yearly period. For example, the earnings of even the past two or three years of many of our industrial properties would give little indication of what they might be able to do under that much abused term — normal conditions. If the offering circular does not go into detail, we feel that investors, wherever possible, should, of their own accord, look back over a sufficient period to take in both de- pression and prosperity and thus get a\'erage conditions. It must be remembered, of course, that surplus earnings, plowed back into a property, will certainly tend to develop an increasing ratio of net earnings to fixed charges, irrespective of depression or prosperit3^ With this qualification, however, a study of earnings over a series of years should certainly be made. Not only the margin over fixed charges should be considered, but also the actual costs of conducting the enterprise. The statement of earnings given in the circular should be looked at carefully to determine whether the fixed charges on the new securities offered are included in the total charges given. If they are, and the earnings as given do not include an estimated increase from the improvements to be made, such a statement can be considered as thoroughly conservative. Balance Sheet The most important item to a prospective investor in the balance sheet that should be given with every new offering is the working capital position of the company; that is, the ratio of current assets to current liabilities. The text: "Internal Financial Management" on Page 27 discusses this factor from the standpoint of industrial enterprises. It shows that on the average, the working capital of an industrial should be between 45 and 50% of its permanent invested capital. Public utilities and railroads, by the nature of their business, do not require anywhere near as much working capital. Their fixed investment is very large, and their borrowing ability at the banks not subject to the same fluctuation as an industrial. 84 1 71 vest me?it Securities In considering working capital position, it should be carefully- noted whether the money to be obtained from the present issue has been included among the current assets or not. This has been discussed under the caption "Purposes of Issue." If it has, it will of course, make the working capital look large, and the position of the company before the new financing should be noted. Summary It is impossible, in a limited discussion, to go into detail in regard to these various points. We do feel, however, that after a client has become convinced that the return on the invest- ment offered appeals to him he should, speaking broadly, follow the various steps outlined here. If he can satisfy himself, through his knowledge of fundamental conditions, taking into consideration probable developments over the next few years, that the factors above enumerated are favorable he may be quite sure that the investment is warranted. Even under such conditions, however, we would warn against believing that any investment may be laid away and forgotten. The experience of the past ten years is all that is needed to show investors the necessity of regularly following the development of the country, the trend of commodity levels, interest rates, and the developm.ent of social conditions in order to watch their invest- ments, and keep security and return at favorable levels. TEST QUESTIONS "INVESTMENT SECURITIES" The test questions outlined below refer directly to the text discussion. You will find them helpful in bringing out the vital points in the individual discussions. They may also be used for review. 1. Define yield and annual return. 2. Discuss the differing t^^pes of corporation bonds. 3. What are the permanent factors affecting bond prices? 4. Describe the last complete cycle of bond prices. 5. Describe the temporary trend of bond prices and what causes it. 6. Do you consider railroad bonds good purchases? Why? 7. What are the strong features behind public utility bonds? 8. What is the reason for their present low prices? 9. If you were buying an industrial preferred stock, what type would you buy and why? 10. What do you think of French and Italian bonds? 11. How would you study a real estate bond? 12. What are the different types of municipal issues? ANALYSIS OUTLINE FOR UTILITY COMPANIES Utility companies, handicapped by the war, are now return- ing to the strong position they previously held. In analyzing public utility securities, all the points outlined below should be kept strongly before the prospective investor. 1. Franchises (a) Type? (b) Do they run beyond maturity of bonds? 2. Rates (a) On what based? (&) Cost of service? (c) What the community will stand? 3. Value of Plant (a) Per cent in excess of bonds outstanding? (b) Asset value of common stock? 4. Capitalization (a) Per cent bonds, per cent stock? (b) Securities issued under approval of commission? 5. Earnings (a) Number of times bond interest earned? (b) Operating ratio favorable? (c) Fluctuations over series of years? (d) Per cent of growth? (e) Per cent decline in previous depressions? 6. Bonds (a) Value of plant over bonds outstanding? (b) Junior or senior mortgage? (c) Mortgage closed? (d) Callable? At what price? 7. Business Field (a) Present size? (&) Recent growth? (c) Transportation facilities? (d) Industries diversified? 8. Management (a) Conservative or risky? (b) Maintenance charges liberal? (c) Per cent of earnings paid in dividends? ((f) Has it strong financial backing? Garden City Press, Inc. Newton, Mass. UNIVERSITY OF CALIFORNIA, LOS ANGELES THE UNIVERSITY L^^^ -^"Y This book is DUE on the I"* cil^lHh^ ^elow ..^Jf-