The Washington herald., 1912-06-02


ance with the laws OF the state in which
the issuIng municipality is located In
some Instances bonds for specific improve
ments. sewers. waterWorka city build
Ings, &C, may be authorized by the City
Council. Mayer. and Board Of Aldermen,
Board OF Estimate and Apportionment.
or other Official body, BY passing resolu-
tins. ordinances, orders, &C. In other
instances the proposition to issue bonds
must be submitted TO the voters for their
approval. Due isctice Of the election
must be published In the local papers for
a stated period. governed by law, usual
ly thirty days before the election All
information regarding the proposed issue
Is Incorporated In such notice. A special
registration committee Is appointed to
look after the details Of calling a special
election, or u II Is near the time for the
regular spring or fall elections, the ques-
ton Of Issuing the bonds Is submitted at
that time in order to avoid the expense
Of a special election. The result OF the
election. either IN favor Of or against the
issue, 10 governed by law. In some States
majority Is all that Is required. while
in others the proposition must be carried
by two-thirds vote OF the registered
voters. A municipal bond issue has been
known to be declared invalid because IL
was found. after the bonds had been
offered. that they we're authorized by a
majority Of the votes cast, but not a
majority pf the registered voters. Bond
issues have also been found to be Illegal
because the notice of the election was
insufiiciently advertised. The notice Of
fering the bonds for sale. as well as the
election notice, must be published accord
ing TO law. All these legal preliminaries
are examined by hrJg OF competent law
yers before .he bonds are offered TO in
vestors by the dealer. and a copy OF the
attorneys opinion as to the legality Of
the issue Is either kept on file or deliv-
cred to the purchaser.
These, however, are not all the safe
guards. In nearly all cases provision Is
made, when the bends are issued. for the
payment Of principal and interest. which
amount Is included In the general tax
levy and a sinking fund is createl for
the payment OF the principal at the time
the bond natures. This class OF bonds.
known as sinking fund bonds" has, un-
til lately, been considered the most de-
sirable. but investors and dealers are
showing preference for serial bonds"
BY this term Is meant an issue OF, say.
10000, maturing 1900 each year for
twenty years. The repayment of this
comparatively small amount OF principal
and interest each year obyiates the ne
cessity and expense Of a sinking fund
and its consequent responsibility, namely,
the management and the careful rein
vestment OF its funds. The investor,
however, does not receive as much return !
on his investment, from a serial bond"
as he would receive on the sinking
fund" bond, for the reason that he re-
ceiyes interest on 5000 less each year
up to the twentieth year.
Besides the lOng-term bond and the |
bonds maturing in even series, there is
what is called an optional bond" where |
the entire principal may be paid at the |
option OF the issuing municipality before |
full maturity, say, fve years, when the |
extreme maturity is twenty years. The !
municipality thereby saves the remaining |
fifteen years interest. Such a bond Is a |
less desirable investment and brings a
lower price because the investor must
figure the interest he will receive, on the
assumption that the bonds will be called
for payment at the expiration OF the
short term-hye years. The intention of
municipal officials to so call an issue for
payment may be advertised for thirty
or sixty days before the date OF redemp-
ton, after which date interest on the
bonds ceases. In some cases the puT-
chasers must be given six months notice
Of such intention.
Stin another class Of municipal bonds
is that which has an average or option
dA-dNeTdBe maturity. An OpllOudl-
average maturity bond is one whose !
principal is payable in odd amounts at |
stated periods or when part Of the entire |
issue may be taken UP before the full !
maturity. Take, for example, an issue |
of ) per cent bonds amounting to Sl0O 00o |
payable as follows: $25,0OO in 8. 10. Is, |
and 20 years from the date Of issue. The |
average maturity would be only twelve |
and one-half years. That is, the invest |
< e.
twelve and One-half years only-not TWEEN |
ty years. II is true he would receive in |
terest fo= twenty years. but not on the |
full 10000. He would receive per cent |
on 10000 for the first five years only: |
then ) per cent on $4,000 for the next |
five years: 5 per cent on $1,000 the next |
five years. and 5 per cent on only $4,000 |
for the remaining five years, averaging 5
per cent on the S1OO0OO for only twelve |
and one-half years. This may be proven |
mathematically by the following theo- |
retical computation (disregarding the re- |
investment OF INTEREST,": Five per cent |
on 10000 for fve years equals 5000; 5 |
per cent on $4,000 for five years equals |
Sls,75O; per cent on $4,000 for FIVE years |
equals sl2,5Oo; per cent on $4,000 for five |
years equals $3.50; total, S., 500. Five per |
cent on 10000 for twelve and one-half |
years equals $3.50; five per cent on $780,
OoO for the full twenty years would |
amount to $4,000. The invester. there |
fore, on an "optional-average bond re-
ceives a little more than half the in !
terest on his money that he would re- !
ceive on the extreme maturity or full |
term"
If the above bonds were sold, payable |
as above, with reservation on the part |
Of the city to pay on all unpaid bonds |
after fifteen years Gnstead Of twenty !
years. the "optional-average" maturity !
would only be eleven and one-rourth |
years
The advantage to a city in selling |
bonds TO mature on such terms is, when, |
for instance. the bonds are issued for \
or a lighting system which, |
after short time, becomes more than |
the additional funds may /
be used to pay on the principal before |
full maturity, thereby saving the interest |
to the municipality for a number OF |
years
Should a city be visited by a calamity
the most serious impairment OF the /
Investment is, usually, a temporary
reduction OF interest only. At the
time when Galveston. Tex, was wiped
out by flood on September 9, 1900,
1000 lives were lost and the property
damage amounted to S30,O 900, there was
a reduction in interest Of ~ per cent for
five years. Subsequently the regular in
terest rate was resumed and the ultimate
value of the bonds was not injured
When San Francisco was almost entirely
destroyed by the earthquake and fire Of
April IS, 1906, in which 452 lives were lost
and property damage amounted to $780,
Oc0, ,0O0 the loss 10 insurance companies