security; for example, the 41 per cent. notes of the Pennsylvania Company, which are secured by stocks, and have principal and interest guaranteed by endorsement by the Pennsylvania Railroad Company.

Investors have always looked with favor upon the shortterm security in the form of the equipment note, the characteristics of which assure its safety as to principal and interest in almost any contingency that might arise.

Status of First Mortgage Bondholder.-The first mortgage bondholder is in the position of a man who lends money to a corporation, repayable at a stated time and at a certain interest rate, the condition being that, if interest or principal is not paid when due, the bondholder owns the property.

This is a simple fundamental fact. It underlies the credit of every corporation. It is in this right of ownership under default that the essence of the genus bond exists.

Reorganization, as applied to corporations, is supposed to mean the building up of a new corporation by taking the assets of the old and issuing against them new securities. The legal presumption is that the old bondholders, the technical owners, are satisfied in full, or in so far as the value of the assets will meet the bonds.

Really, reorganization has come to mean a process by which the technical owners are likely to be frozen out of a part of their heritage. They are told that it will be to the interest of the company not to assess the stockholders, and are therefore asked to take something or other that will amount to, perhaps, 80 per cent. or 90 per cent. on the face value of their bonds. In other words, they are asked to pay the assessment of 20 per cent. or 10 per cent., as the case may be, so as to avoid the unpleasant and impolite necessity of asking the stockholders for any more money.

The stockholder, be it understood, is generally represented by the reorganization committee, headed by a powerful banking house, and the most potent inducement held out to the bondholder is that if this plan goes through, the "powerful interests" in question will lend such credit to the new corporation that the stuff he gets for his bond is certain to ultimately appreciate greatly in value, etc.

În about nine cases out of ten the bondholder takes what he gets and is thankful. In the tenth he becomes what is technically known as an "obstructionist," and sometimes it is shouted from the housetops that "he wants to be bought." These are frequently found, when closely investigated, to be only poor people who wanted $1,000 for their bonds because

they knew the bonds called for that amount, and because they knew that the value was there. They lack discrimination. They fail to recognize that the unlucky speculator who bought the stock at 10 as an attractive gamble, really should not be compelled to spend any more money on what was, manifestly, a very bad bargain. Bondholders have actually been known to insinuate that it would serve the speculator right if he had to supplement his five-point margin with a ten-point assignment.

Suppose, for instance, that a corporation has $16,500,000 of first-mortgage bonds scattered about the United States, and fails to pay the interest at the stated time. The assets of this corporation are worth, if sold for the highest price obtainablenot under a snap auction sale, but by real business men, in a real business way-over $16,500,000. The theorist will say off-hand that the bonds are worth par. Strange to say, they linger in the 80's. That is because a protective committee has been formed in the interest of the stockholders to reorganize the company.

The plan comes out. It provides for the bondholders, and every stockholder and every member of the protective committee says the provision is liberal. The only person who thinks it isn't is the bondholder, who still vaguely wonders why he can't get at the thousand dollars the company owes him. In time, perhaps, he begins to think the reorganization committee has something to do with it, and there is a suit at law, generally settled out of court.

There have been, quite recently, several cases of reorganization without assessment on the stock. The company starts up with new working capital, and no one seems to be surprised that the reorganizers have managed, apparently, to make something out of nothing. The old bondholder is about the only man who really knows where the money was found, and he is generally reluctant to tell, for it makes him look ridiculous..

Theoretical and Market Value of Bonds.—It is usually the case that the absolute or theoretical value of a bond differs more or less widely from its market value. This is far less true of Government bonds than of others with greater uncertainty as to solvency. The premium demanded by a bond is determined, first, by its solvency-its certainty of full redemption; second, by the rate of interest that it bears; third, by the time it has to run; fourth, by any outside circumstances-permanent or passing-which may make its possession desirable or necessary. The extent to which the rate of interest called for by a bond influences the premium, depends upon how much that rate exceeds the recognized actual or standard value of money.

Terminal Bonds.-Terminal bonds, secured on city and suburban terminal properties used by big railroad systems, form a small but interesting class of investments which appeals directly to the most careful class of investors. Terminal first mortgages on main line property are generally classed as gilt-edge when guaranteed by any railroad using the terminals. How vital a matter the safety of these mortgages is to the railroads may be aptly illustrated by the fact that Erie paid all dues to Buffalo Creek even through the Erie receiverships.

Terminal mortgages are very various, and some are very peculiar. They may be classed as follows:

1. Mortgages on terminal property used by railroads, but not owned or controlled by railroads, and without guarantee. Chicago Terminal Transfer first 4's, Columbus Terminal 5's, Northern Pacific Terminal 6's, are examples. This is the weakest class of terminal bonds.

2. Mortgages on terminal property not owned but used by one or more railroads, and guaranteed by tenants. Terminal Railroad Association, of St. Louis, 4's, etc., Buffalo Creek 4's, are examples. Such bonds are usually very strong.

3. Mortgages secured on terminals owned by railroad companies, and either issued directly by the railroads or guaranteed by the railroads. Wabash Terminal 4's, Columbus, Connecting & Terminal 5's, Delaware River Terminal 5's, New York, Lackawanna & Western Terminal & Improvement 5's, Long Dock 6's, Chicago, Milwaukee & St. Paul Terminal 5's, are good examples. This is the largest class of terminal bonds. Its strength varies with the strength of the guarantor company and the location of the terminal.

4. Mortgages partly secured on terminals, issued by the railroads, and generally covering mileage and other property. Erie general and prior lien 4's, Rock Island first and refunding 4's, are good examples. Their strength is dependent on the credit of the companies.

The following list contains most of the terminal bonds, with dates and prices, dealt in on New York markets:

The fourth class is very broad, and the bonds are like straight mortgage securities on mileage. They have no place in the above list.

It will be noted, of course, that the list above does not include bonds or by any means all terminals. Omaha, Pittsburg, Peoria, Memphis-in fact, probably a majority of the cities, have terminal companies that lease facilities to railroads. In most cases the bonds of these companies are either held by the original incorporators or are very narrowly distributed.

It will be noted that the value of the security, or property, under a terminal mortgage is apt to increase much faster than the selling value of a railroad property itself. For example, the terminal property owned by Central of New Jersey in Jersey City, by New York Central in New York, by 'Frisco in Memphis, St. Louis, and Chicago, by Pennsylvania and Baltimore & Ohio in Pittsburg, could not be duplicated to-day at three times the price at which it was originally bought and bonded. The St. Louis Terminal bonds rightly sell high, representing as they do a property that is almost a monopoly and defies duplication, and also_the_guarantee of many railroads. Similarly the New Orleans Terminal bonds, the Wabash bonds, and others represent the cost of property that could not be duplicated in these cities.

Underlying Railroad Bonds.-When a company has made two issues of bonds, one issue secured by a first mortgage on all or a part of its property, and the other issue secured by a second mortgage on the same property, the bonds secured by the first mortgage are designated as underlying bonds, inasmuch as they underlie those secured by the second mortgage.

Varying_Degrees of Underlying Security.—Opinion of a banker: "During the consolidation of the last seven years, of railroads as well as industrial corporations, a great many collateral trust loans having a long time to run have been made, and the public sentiment against these consolidations has been extended to the creation of the collateral securities largely con

temporaneous with it. This sort of security, however, is not quite as new as most people seem to believe. All the large railroad corporations which were reorganized in the '90's had issues of collateral trust bonds or notes outstanding at the time, and as we can always learn from the past, it is interesting to analyze the treatment of these securities during these reorganizations. It is found that in each case they were dealt with in accordance with the merit of the underlying security— that is, on a basis of the actual intrinsic value of the collateral. The past history of collateral trust notes and bonds merely goes to prove that like first mortgage bonds, or any other security, there are all kinds-good, bad, and indifferent—and the prospective purchaser of this class of securities, the same as that of any other bonds or merchandise, should investigate before buying.

'Leaving aside for the moment the merits of the security which forms the collateral, but merely looking at the facility for getting possession of the collateral in case of default on the part of the maker of the obligation, the collateral trust bond is really preferable to a first mortgage which may be secured on property in different States or a great distance from the financial centers. In order to foreclose a first mortgage, receiverships and tedious and expensive proceedings are generally necessary, while in the case of a collateral trust bond the pledged securities can be easily reduced to possession by putting same up at auction in one of the financial centers."

PART IV

Real Estate Mortgage Bonds

Real Estate (Guaranteed) Mortgage Bonds.-The careful buyer of investments of this class will investigate for himself the character of the property behind his bond. The range of securities offered is decidedly broad. He should also remember that in the event of the mortgage expiring the power of substitution is to be considered together with the relationship of the mortgage company to this power. Also he should investigate regarding the nature of the guarantee. Is it an unqualified guarantee? Some companies except "any depreciation in the mortgage security caused by fire, explosion, riot, war, tornado, earthquake, defect in title or prior encumbrance." When properly scrutinized bonds of this character are to be highly