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The Financial Department is prepared to furnish information regarding standard investment securities, but cannot undertake to advise the purchase of any specific security. It will give to inquirers facts of record or information resulting from expert investigation, and a nominal charge of one dollar per inquiry will be made for this special service. All letters of inquiry should be addressed to THE OUTLOOK FINANCIAL DEPARTMENT, 381 Fourth Avenue, New York

RAILWAY BONDS

AILWAY bonds are bonds issued by railway corporations. Every one knows that. Every one is not familiar with the various kinds of railway bonds, however, and it is our belief that a few words of explanation about the different railway issues may be of interest to our readers. This is a subject to which a large-sized book could easily be devoted, and, as our space is limited, we can do little more than mention the salient points in connection with it.

In considering any bond there are three points to bear in

mind: the security of the bond itself, the credit standing of the company which issued it, and the salability of the invest ment. The third point is minor to the others, but important none the less. We shall concern ourselves chiefly with the first two.

Both security and credit position should be carefully investigated, and one is often worth little unless the other too is satisfactory. The security for a bond is largely determined by the bonded debt per mile of road; the credit position, by the

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For Your Business with Europe

AM

MERICAN houses doing business with Europe have at their service
American banks in important centers abroad.

The Guaranty Trust Company maintains important branches in London,
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- earnings per mile. For example, two roads may have net earnings of $5,000 per mile, but if one road has a bonded indebtedness of $100,000 a mile and the other $25,000 it stands to reason that -the bond issued by the road with the lower indebtedness is the better investment. The first road is obliged to pay interest on bonds issued at the rate of $100,000 a mile, and its earnings are no larger than the second corporation with a bonded indebtedness of only onefourth as much. Obviously, the credit position of the second road is better : than that of the first. It might even happen that a given road would have so strong a credit position that its debenture bonds-mere unsecured promises to pay-would be rated better investments than the mortgage bonds of a weaker road. This does not mean to say that credit is necessarily more important than security; the point is that neither one should be emphasized at the. expense of the other.

In acquiring security it is well for the investor to find out just what portion of the railway system is pledged for the payment of his bond. Is it the main line, an important division, or merely a branch which is not essential to the prosperity of the railway and which it could easily get along without? On the answers to these questions may depend the value of the bonds as a highgrade investment.

Most of our great transportation systems are made up of numerous small railways which from time to time have been taken over and absorbed by the main roads. The small roads in nearly every case have had bonds outstanding secured by their properties. When these roads have been absorbed, they have become divisions of the parent system, which has also assumed the obligation of their outstanding bonds. Such bonds are what are known as "divisional liens," and if the particular division by which they are secured is essential to the main system they may be extremely valuable and high-grade issues. In fact, they are usually the underlying bonds which have a claim on the property prior to all the other mortgage bonds. And frequently they are difficult to buy, because the floating supply is small and because their owners, appreciating their investment qualities, are unwilling to part with them.

The divisional liens may or may not be secured by main-line mileage, but they rank ahead of all other bonds on that particular division. Next in rank come the bonds secured by a first mortgage on the main lines. They may not be a first mortgage on the mileage of the entire line, but the highest-grade ones are usually secured by a major part of it, and such bonds issued by our largest systems are usually regarded as investments of the best class. These bonds are easier to buy than the divisional liens, because they are usually outstanding in larger quantities and the supply is therefore more abundant.

After the first mortgages come the general mortgage bonds, which in most

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FINANCIAL DEPARTMENT

(Continued)

cases are refunding bonds as well, their due dates being more distant than the underlying bonds and a sufficient nunt ber of them being reserved for paying off-or refunding-the prior liens upon maturity. In some instances these issues have been made to run a hundred years or more and the entire mileage of the company included in the property covered by the mortgage. Sometimes terminals, and even equipment, have been included. These general mortgage bonds cover, in most instances, the same property covered by the divisional liens and the first mortgages, but are junior mortgages. That is to say, the divis ional liens and first mortgages rank ahead of them. To illustrate how this would work out, suppose a railway had outstanding $5,000,000 of bonds, due $2,500,000 in 1930 and $2,500,000 in 1935. secured on the properties of the various divisions acquired in making up the system; then come $15,000,000 of firstmortgage bonds due in 1940 and secured also by these same divisional properties and on the main-line mileage as well As time went on and it became necessary to do new financing and raise more money, a general mortgage was created providing for the issuance of $40,000,000 of bonds due 1990. Twenty million of these bonds were to be issued imme diately, the balance being reserved to refund the $2,500,000 of divisional liens due in 1930, the $2,500,000 due 1935, and the $15,000,000 of first-mortgage bonds due in 1940. And of course every time an issue of underlying bonds is retired the general mortgage bonds themselves improve their rank, until they them selves will eventually become first-mortgage bonds when all the issues ahead of them are paid off and canceled.

General mortgages have not been as popular with railway companies in late years as they were formerly. Their place has been usurped to a large extent by refunding mortgages, and in cases where refunding mortgages have been made and there was already a general mortgage the latter has usually been "closed"-that is, no more bonds can be issued under its provisions. Refunding mortgages operate in much the same way as the general mortgages, however. And usually such mortgages cover the same property and any additional property acquired-sometimes "to be here after acquired"-since the date of the general mortgage. Usually too the bonds may be issued at various times and at varying rates of interest, depending upon the state of the money market at the time they are sold. One big railway, for instance, has 4, 5, and 6 per cent refunding bonds outstanding, all secured by the same mortgage. The re funding bonds, as their name implies are used to retire underlying liens, and when first issued are usually a first lien on a small amount of mileage-the amount acquired since the genera! mortgage-and may be second, third, or even a fourth lien on other portions.

Convertible bonds are, as their name

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implies, convertible into-exchangeable for-stock. The conditions upon which this exchange may be made are subject to considerable variation. The bonds are usually convertible into stock at a certain price, and sometimes before a certain date. For example, a thousanddollar bond may be convertible into stock, one share of stock for each $100, at the rate of, say, $100 a share, and the conversion privilege may expire in ten years-ten years before the bonds mature. If the stock is selling at less than $100 a share, there is very likely no inducement for the bondholders to avail themselves of the conversion privilege, but if the stock should climb to more than that figure the exchange would of course be profitable. Convertible bonds are prone to fluctuate more or less with the selling price of the stock. If they are secured by a mortgage, they are naturally safer than the stock, and probably sell at a higher figure. They are not always thus secured, however, and may depend upon the credit position of the issuing corporation for their value as investments. Determining the worth of a convertible bond is often a

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complicated affair and deserves careful attention.

Collateral trust bonds are secured by the deposit of other securities. Sometimes these securities may be stocks and bonds of the issuing company, or possibly of other companies which are owned by the issuing corporation. Strictly speaking, they are not mortgage bonds, although some of the bonds pledged for their payment may themselves be secured by a mortgage on the property.

Debenture bonds, in the true sense of the word, are merely promises to pay. Sometimes they enjoy mortgage security, but in most cases they are merely an obligation on the part of the issuing company. The credit position of the issuing company is a very important factor of course in the case of unsecured bonds.

Income and adjustment bonds are usually issued after a reorganization or receivership. At such times it is important to reduce the fixed charges of the company, and these bonds usually pay interest only if it is earned, and sometimes the interest is cumulative, sometimes not. These bonds may in some cases be secured by a mortgage, but, with the debentures, are usually considered among the weakest of a railway's issue. Of course if the company's credit position is good these bonds may be considered good investments.

Equipment bonds are almost always rated as high-grade investments, being secured by rolling stock (cars, locomo

Are You An Investor?tives, etc.)-equipment necessary to the

During the past year the Financial Editor of The Outlook has helped hundreds of Outlook readers to solve intelligently their particular investment problems. Perhaps you are contemplating a shifting of your present holdings or have fresh funds to invest. In either case we shall be glad to give you specific information on any securities in which you may be interested. A nominal charge of one dollar per inquiry will be made for this special service.

operation of the road-and the value of the security is usually considerably in excess of the amount of bonds outstanding. It is customary for equipment bonds to mature serially, a certain proportion every year, so that as the rolling, stock deteriorates the amount of the outstanding bonds is correspondingly re

duced.

Terminal bonds are also considered high grade in most cases. Terminals, like equipment, are necessary to the

The Outlook Financial Department operation of a railway, extremely valu

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able, and in the majority of cases the interest on terminal bonds is made an operating charge on the roads which make use of the terminals. Sometimes-in the case of a union station, for instance the various roads using the terminal all join in guaranteeing the bonds secured by the property, so that the bonds may be the guaranteed obligation of several railway systems.

These are the main classes of railway bonds. The layman cannot expect to be familiar with them in detail, for a thorough knowledge of bonds requires years of study and experience. Men with knowledge of the subject are always available in the best banking houses, however, and their knowledge is at the disposal of their clients and prospective clients. And, after all, the three main things to find out about are the security for the bond, the credit position of the issuing corporation, and the marketability of the investment. Satisfied as to these three points, the investor can proceed with confidence.

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