10. Objections To Collateral Trust Bonds

The chief objection to a collateral trust bond is that the securities too often fluctuate so much in value as to impair the lender's security. Of course, the security may possess the highest value. Occasionally one of the older and richer companies issues a bond of this kind, but rarely. When it does, the security is unexceptional. Such bonds are usually put forth by companies which have exhausted almost every other source of credit, and resort to the securities they happen to have as a last resource for obtaining money

11. Terminal Bonds

Another kind of bond that has acquired a secure standing is the terminal bond. This is issued to pay for obtaining new terminal facilities. In a large city the cost of the land, station, other structures, and tracks often absorbs a large sum. One of the peculiarities of a terminal bond is that the interest is regarded as a necessary expenditure like the wages of employees, rails, and other materials purchased to preserve the road and keep it in operation. Consequently the interest charge is paid before that on other kind of security, even that of a first mortgage bond. If the receipts of a railroad are ample to pay the interest on all of its obligations, then the payment of the interest on terminal bonds as a part of the working expenses is of no consequence to any class of bondholders, but if the receipts are insufficient to pay all the running expenses and fixed charges, then by charging the interest on these bonds as an item of ordinary running expense the security of the bondholders is, to a corresponding extent, impaired. If, for example, a railroad com-pany had issued four mortgages,and the last one was for $5,000,000, and should earn just about enough to pay the interest on all, and also its running expenses, and should afterward issue $5,000,000 of terminal bonds, this step might have the effect, for a while at least, of cutting off the mortgagees of the fourth class from receiving any interest and thereby seriously impairing the value of their bonds Bondholders have contended that such action by a com-pany was not legal, but the courts have generally, though not always, decided against them. The interest charge is held to be ;a needful running expensed and must be paid even though the mortgages receive less in the wayof interest and also suffer incidental loss by the impairment of their securities

12. Debenture Bonds

A debenture bond is much like a non-cumulative income bond. It is a bond resting on the general resources of the company, and the interest is payable after the fixed charges and necessary running expenses are paid. In this country they have not been often issued, because the receipt of income from them is so uncertain. They are of no higher character than common stock. The owners can receive nothing until all other fixed charges are paid. Whether they receive anything or not depends, therefore, on the character of the manager of a company. Suppose, after all the charges of every kind except interest on these bonds have been paid, a considerable sum is still left. It does not necessarily follow that it will go to debenture holders. The managers may say, "We need this money for a new bridge or to purchase rails, or for a new station or sidings," and divert it into the expenditure account instead of paying it to the debenture holders.