Business English: A Practice Book

by Rose Buhlig

Bonds

Suppose that A owns a house with a store in it, and in the store he carries on a grocery business. Suppose that by enlarging his store and putting in a bigger stock of goods he can make more money. The improvements will cost $1,000, but he hasn't the money. He goes to B to ask B to lend him $1,000 for five years, offering B the house as security. B gives A the $1,000 and in return gets a certain amount of interest each year and A's mortgage note against the property. This means that, if at the end of five years A cannot pay the $1,000, B has the right to sell A's house and collect the money due him.

When a corporation borrows money to extend its properties, plants, or rights, the transaction is really the same, although the form is somewhat different. Just as all the capital stock of a corporation is divided into shares owned by a number of people, so, when the corporation borrows money, the amount borrowed is divided into smaller parts of $500 or $1,000 each, called bonds, which the corporation sells through its bankers to people who have idle money to invest. Twice each year, as stated in the bond, the corporation pays interest on the borrowed money at the rate, probably, of 4, 4½, 5, or 6 per cent. After a definite number of years, as stated in the bond, the corporation is obliged to pay back the amount of money that it borrowed. This is called redeeming the bonds. To show that it intends to pay back the amount borrowed at the end of the time stated, or redeem the bonds when they become due, the corporation puts a mortgage on its real estate, buildings, machinery, and equipment. When the bonds become due—or mature, as it is called—if the corporation does not pay back the amount borrowed, the holders of the bonds may take possession of the company's real estate, buildings, machinery, and equipment on which the company has placed the mortgage and may sell them to recover the money they have loaned. Thus, while the stockholders of a corporation have no assurance that they will ever get their money back or will ever get any interest on it, the holders of carefully selected bonds are reasonably sure of getting a certain amount of interest each year and of getting their money back when the bonds mature. Shares of stock represent the investment made by the stockholders who own the company, whereas bonds represent the investment of those who loan money to the company. We can readily see, then, that the stockholders take the greater risk. For this reason it is expected that stocks should yield a higher profit than bonds, and this is usually the case.

The greater portion of the bonds that are issued by corporations run for long periods—twenty, forty, fifty, and even one hundred years. At times when money rates are high, corporations that need funds are reluctant to pay a high rate for so many years, and so they issue short time bonds to run from two to five years, in the hope that at the end of the time money rates will be lower and more favorable to their issuing long time bonds. Many companies, especially industrial corporations and railroads, have issued obligations to pay, notes running from six months to five years. They are not usually secured by a mortgage on the property but are merely the company's promise to pay, the interest and the principal taking precedence over the dividends on the preferred and the common stocks.

Corporate Organization

Before a corporation can carry on its business, it must obtain a charter from one of the states of the United States, whose laws it must obey. The laws of some states are more lenient than those of others, allowing the corporations more privileges. New Jersey is thus lenient; consequently we find many large corporations—such as the United States Steel Corporation, the American Sugar Refining Company, and others—organized under the laws of New Jersey. After the charter is granted and the stock bought by the stockholders, the latter have a meeting, at which they elect a small number of men to be directors, who, as the name signifies, conduct the business of the company for the stockholders. They choose a president, one or more vice-presidents, a treasurer, a secretary, and any other officers necessary to carry on the business under the control of the directors. The term of office of the directors is usually so fixed that the term of a part of them expires each year, so that each year the stockholders have an annual meeting at which they elect new directors or re-elect the old ones whose term has expired.

The Railroad

Corporations divide themselves into three large groups; viz., railroad companies, public utility corporations, and industrial corporations. Of these, the group composed of the largest and most powerful corporations is the railroad group.

Railroads have two general sources of income, the larger being the revenue received from operating trains, both freight and passenger; and the smaller being the return from investments in other companies, from real estate, and from the rental of lines, terminals, stations, and cars to other railroads. To carry on the second or smaller part of its business, the company needs an organization much like any other business, but to conduct the first part it requires a special organization. This divides itself into four departments, usually with a vice-president at the head of each: (1) the traffic department, (2) the operating department, (3) the finance and accounting department, and (4) the legal department.

It is the duty of the traffic department to get the business for the company and adjust all traffic claims. In short, it does everything to increase the business and the earnings. This department naturally divides into the freight traffic and passenger traffic departments, with a superintendent or manager at the head of each.