Evening star., 1912-11-24
SERIAL BOND TALK
u. S. Treasurer Discusses
Their Use for Roads
| IN PLACE OF SINKING FUND
Should Be Only as Long as Life of
Utility Created.
MEAN IMMEDIATE BENEFIT
Scheme Is Flexible and Can Be
Worked Out to Suit Almost
Any Condition.
MEAN IMMEDIATE BENEFIT

provement are justified when based upon
careful estimates and sound business pol
| 1cies; that the mere fact that good road
is needed is not sufficient to warrant the
| issuance of road building bonds; that the
expenditure of funds from a bond issue
should be directed by the most compe-
tent authority possible, and that the is
| suance of bonds should not be for a
longer term of duration than the term
of the life of the utility created by the
funds derived from the bonds.
Coming to an intimate discussion of
bonds for road building, Mr.. McClung
said:
'"The advantages justly claimed for
bond issues in road improvement are,
first, that they enable the community to
| realize Immediately the benefit, as such
issues make possible the construction of
considerable mileage, whereas cash
| taxation would provide but small mile
age each year, thus Indefinitely post
pOning the completion of the road sys-
tenn; second, that the cost per mile is
lowered. as a large mi cage can be more
economically constructed than isolated
stretches built at long intervals; third,
that maintenance is cheaper for the same
reasons that apply to construction;
fourth, that, posterity benefits by the
development of the local resources, pos
leIily SHOuIu HGlp " UcdT Tic Jul oChs
and fifth, that the increase in the value
of lands and in the volume of business is
immediate and substantial and is more
than sufficient to meet the increased tax
rate necessary to pay the interest on
and to retire the bonds.
General Use Of Sinking Fund.
Municipal bond issues are usually Sc
cured by a sinking fund, particularly
ad
after a long period The borrowing of
large sums of money for long periods has
reached such proportions that it is an i'm
portant question to determine the most
advantageous provisions for the liqu1da-
ton of these loans Generally speaking,
the promise of a sinking fund appears TO
give a proposed issue of bonds tone OF
strength and security in the mind OF the
investor, because the ultimate liquidation
at maturity of the money borrowed is
theoretically assured through its opera
ton. Few, however, endeavor to ascer-
tain how sinking funds operate. expert
ence teaches US that they are doubtful
assurance to the lender and an expensive
undertaking to the borrower.
ITO have any particular value the pro-
visions for a sinking fund must be con-
scientiously carried out, and the accumu-
lated funds must be advantaseously u.li-
lied in the purchase of it's own bonds for
retirement or of other good bonds Tor
investment That the first is not always
done is well known. and that the invest
ment of the fund is subject to all sorts OF
contingencies is self-evident
Is Unknown Quantity.
However sound in theory sinking
fund may be, it's administration cannot
be placed beyond the pale of human
weakness; it always was and doubtless
ify-
speculation. There are uncertainties In
the management of sinking fund which
should receive serious consideration by
all public-spirited men. 1t may De de-
pIeted by dishonest or incompetent oin-
cials or by unfriendly legislation. Even
with wise management, the rate of inter-
est yield cannot be controlled, and when
the securities must be sold to obtain the
funds with which to pay the DEBT LOT
which it was accumulated the proceeds
may or may not be sufficient to cover the
loan.
Another uncertainty of the sinking
fund plan is that at the maturity of a
loan for which provision has been made
the amount necessary for the loan may
have been properly accumulated In the
consist of the particular loan to be re-
deemed, and the balance may have been
invested in other securities, which must
be sold, whether conditions are favorable
or not to obtain the funds necessary to
pay the loan for which they were accu-
mulated.
Payment Only True Amortization.
Sinking funds do not amortize a debt;
they merely convert it, or offset it. The
only true amortization is extinction. The
only way to sink a debt is to pay it. A
simple. rational and economic method of
ex.inguishing a debt Is to pay 1T In ap-
IproximateIy equal periodic installments.
This is the serial bond method
Under this plan the specific amounts
to be paid each year on account of prin-
cipal and interest are determined In ad-
vance, and the liability of the issuing
municipality is reduced with every pay
ment made.
There is no guessing: it is fixed figures
and facts from first to last If an issue
of serial bonds amounts to $1,OOO,OO for
instance. running for ten years, $lOO,OoO
will be paid off each year, and interest
will only be paid on the remaining prin-
cipal amounts each year up to the time
of maturity. Thus, If an issue of $1,000
GOO per cent bonds were made, the own
ers would receive $4,000 interest the first
year (Which is per cent of S1.OOOOOO:
$780, 600 interest (Which is per cent of
$500. .OOO 100000 having been paid the
next year; $50 600 the third year; $4,000
the fourth year: $4,000 the fifth: $4,000
the sixth $4,000 the seventh; $12,OO the
c1SHIQ, SSOUO Tic IllIili dIlu, dS Oily
100000 of the principal remains he
would receive per cent of that amount,
or $4,000, the tenth year. The interest
payments, all told, would aggregate
$220,OOO
Serial bonds are designated as is
years or 500 years, ETC.. meaning that
the principal is to be retired beginning
the first year, and then to be reduced by
SO much each year thereafter, or that
it is to be retired beginning the fifth
Qfc tho meanfiYna until the
first payment of principal, the investors
receive interest on the full amount.
Advantage Of Serial Bonds.
sinking funds are not only liable to
misappropriation. unwise investment,
suspension and the like. but they are
costly Their average earnings are lit
tie. IL any, over 3 per cent. Serial bonds
require a minimum of expense and pro-
duce a maximum Of security. It is claim
ed that when bond issue is serial the
investment grows safer as 1t grows older
and diminishes In principal.
lone of the objections advanced to the
serial plan is that the earlier payments
are too large on account Of the large
interest payments and a heavy drain on
the taxpayers. However, this applies
only to the plan of paying an equal
amount on the principal each year: the
annual charge could be made less from
the beginning than the sinking fund re-
quirements would be. The scheme Is
flexible, and plan can be worked out
to suit almost any condition. Naturally,
the larger the payments on account OF