Collateral trust bonds are covered by other securities owned by the issuing corporation and, as you examine the balance sheets of various corporations, you will find that many of them have holdings of associated or subsidiary companies. Others might have simply income-producing stocks and bonds held as investments.
A debenture is not secured by property or collateral of any sort, and is simply a general claim against the issuing corporation. In ordinary circumstances, with pledged bonds ahead of it, the debenture would have to be considered the lowest-ranking bond. A number of outstanding corporationsStandard Oil (New Jersey) among themissue nothing but debentures, however, which means that for them these are the senior securities.
Each kind of bond may also be subject to various provisions concerning its maturity, the method of paying it off, and whether it may be called or converted.
Today most bonds mature in 20 to 40 years. Railroads and utilities may offer them over longer terms; industrial bonds tend to have a shorter life.
Sinking-fund bonds, as noted, mean that the company is paying periodically into an earmarked account the funds with which it expects to redeem the bonds at maturity. "Serial" bonds, also encountered frequently today, are retired in batches, according to a predetermined schedule of installments.
The call provision found in most bonds today permits the company to call in, or redeem, the issue at its convenience by paying the principal plus a premium. This varies, but it is usually several per cent and declines as the bond approaches maturity. This is no delight for the investor who would just as soon keep his money invested over the long term at what he considers a decent rate of return. But it is a large advantage for the corporation that, in fat years, wishes to seize an opportunity to get out from under a load of debt or, when money is easy, to replace one bond issue with another carrying a lower interest rate.
Among the more famous of high-grade corporate bonds are the Atchison, Topeka & Santa Fe Railroad's "Gold 4s." They were issued in 1895 with a life of 100 years, and no provision for redeeming them at any price. The risk for holders of a redeemable bond is that the call may come at an inflationary point, when the dollars he receives may have depreciated in value. Not so the Gold 4s. Owners may hold on until 1995, or pick any one of the 35 years ahead as the selling point at which the originally invested principal will be returned intact and in dollars worth more than 47.3 cents each.
Bonds offering a conversion privilege may be exchanged for the company's common stock whenever the holder wishes. Many investors like this double-barreled opportunity because it gives them a full measure of safety plus the chance to improve their return if the company's dividends should increase or if inflation should make cheaper, but more plentiful, dividend dollars desirable. Such bonds usually state the number of shares into which they are convertible, and the number usually declines as the years wear on.
No matter what kind of investment you plan to make, remember to consult with a trusted broker, and never, ever put all of your eggs in one basket.