Evening star. [volume] (Washington, D.C.) 1854-1972, 1927-01-15
Commodity Level Sound.

which perplex the uninitiated is why
safe bonds, about whose merit there
never has been any doubt, are worth
more at one period than at another
A bond, of course, is q promise Of a
corporation or a government to pay
back q specified sum of money at q
stated date, and to pay a stipulated
rate Of interest in the meantime. The
promise may or may not be secured
by collateral. If the promise will I'M
questionably be fulfilled irrespective
of whether prosperous or depressed
conditions exist, why Is the bond
worth 100 one year and perhaps 105
the next? This question Is frequent
ly raised by amateurs
In the recent rally, United States
Government bonds have climbed up
ward. At no time since the Liberty
bonds were issued has there been any
question that the Treasury would
meet all its obligations promptly. and
yet these prime issues have tiuctuated
over an arc of more than 20 points at
the open market place. Six years ago
a 81 900 Government bond could have
been bought at the Stock Exchange
for 5000 less than today.
Changing Interest Rate.
The primary cause of the fiuctua-
tions Is the changing interest rate.
The rental value Of capital rises and
falls through the years, in accordance
with changing conditions of supply
and demand. The price of bonds adj
iusts itself to the shifting interest rate,
so that outstanding bonds will at any
time yield approximately what they
would return to the investor If they
were issued for the first time on the
day he purchases them from another
holder at the Stock Exchange. If long
term interest rates decline as has
been the case in recent years-high.
grade bonds rise in price. The yield
becomes smaller as the prevailing in
terest rate falls.
This price adjustment has no rela-
ton to the public attitude toward the
credit Of the borrower, in which there
has never been the slightest doubt.
Where the ability of a borrowing cor
poration is held in doubt, the corpo-
rate bond benefits from rising prosper
ity on the part of the corporation.
But in the case of the best grade Of
bonds, where the solvency of the bor-
rover Is beyond question, prosperity,
by raising the interest rates, may re-
| suit in a decline in the price of bonds.
Reverse Has Occurred.
Usually widespread prosperity re-
suits in a decline of the best invest
ment issues, but just the reverse has
occurred during the present cycle.
The country has witnessed the ex'
traordinary phenomenon OF expand
ing business and falling interest
rates. The seemingly contradictory
situation is in part explained by the
artificial credit easement caused by
the prodigious imports Of gold. during
the last decade. NJreover, hand-to-
mouth buying a., rapid transporta-
ton are enabling business men to
finance a given volume Of trade with
less credit than in the past.
The present fall in the rental value
of capital already has been striking,
and has carried bond prices far above
the depressed levels Of six or seven
years ago. On the other hand. the
cost Of capital is still far above where
! 1t was at the beginning of the pres
ent century, and some capable econ
omists expect the present movement
to go substantially further.