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Ch. 8] TREATMENT OF SINKING FUND RESERVES 593
as valuable when the bonds are due as when they are issued,
there is no need for a sinking fund, as the corporation will be
able to refund them without serious difficulty. If, on the other
hand, there is little specific property behind the bonds, it is
necessary to create a reserve during the time they are outstanding,
so that money for their payment may be available in case
the general credit of the corporation is not strong enough to
insure their reissue. Similarly in cases where the property
behind the bonds is gradually used up by the operation of the
business, as with timber or coal, the bonds must carry a sinking
fund to protect the principal of the loan.
It should be added, also, that if the sinking fund provisions
make it obligatory for the corporation to buy the bonds in the
open market, the general salability of the bonds during their
Hfe will be increased somewhat. This is especially true of small
issues but little known and possessing, as a natural consequence,
a narrow market.
Use of Sinkmg Funds Decreasing Among Railroads
Until 1893 the sinking fund provision was common among
railroad bond issues—on the assumption that railway mortgages
should be ultimately paid off.^ It gave considerable
trouble, however, as a trustee of a bond issue would not force
the payment of the instalments if such a course was likely to
result in a receivership. In that event the bonds which he was
seeking to protect would be injured to a vastly greater degree,
as experience had shown that the publicity of a railroad's
financial disaster hurts the value of every one of its bond issues,
even the most secure. The trustee, therefore, merely brought
pressure to bear on the railroad corporation to meet the sinking
fund obligation, but if the management remained obdurate
nothing was accomplished. So that in practice, at the critical
moment when the sinking fund was intended to be of most use
in protecting the bonds, it proved to be completely ineffective.
^ There were, of course, exception», and the issue of the Lehigh Valley Consolidated
Mortgage 45-^ per cent and 6 per cent Annuities of 1873 showed a willingness
of one railroad corporation at least to create perpetual debt.
Beschrijving voorwerp
| Titel | The financial policy of corporations |
| Auteur | Dewing, Arthur Stone |
| Jaartal | 1926 |
| Collectienaam | NIVRA Historisch Archief, UBVU gedigitaliseerd |
| PPN | 344552586 |
| Toegangsgegevens (URL) | http://imagebase.ubvu.vu.nl/getobj.php?ppn=344552586 |
| Signatuur origineel | NIVRAHA149 |
| Evaluatie |
Beschrijving
| Titel | NIVRAHA149_00617 |
| Transcript | Ch. 8] TREATMENT OF SINKING FUND RESERVES 593 as valuable when the bonds are due as when they are issued, there is no need for a sinking fund, as the corporation will be able to refund them without serious difficulty. If, on the other hand, there is little specific property behind the bonds, it is necessary to create a reserve during the time they are outstanding, so that money for their payment may be available in case the general credit of the corporation is not strong enough to insure their reissue. Similarly in cases where the property behind the bonds is gradually used up by the operation of the business, as with timber or coal, the bonds must carry a sinking fund to protect the principal of the loan. It should be added, also, that if the sinking fund provisions make it obligatory for the corporation to buy the bonds in the open market, the general salability of the bonds during their Hfe will be increased somewhat. This is especially true of small issues but little known and possessing, as a natural consequence, a narrow market. Use of Sinkmg Funds Decreasing Among Railroads Until 1893 the sinking fund provision was common among railroad bond issues—on the assumption that railway mortgages should be ultimately paid off.^ It gave considerable trouble, however, as a trustee of a bond issue would not force the payment of the instalments if such a course was likely to result in a receivership. In that event the bonds which he was seeking to protect would be injured to a vastly greater degree, as experience had shown that the publicity of a railroad's financial disaster hurts the value of every one of its bond issues, even the most secure. The trustee, therefore, merely brought pressure to bear on the railroad corporation to meet the sinking fund obligation, but if the management remained obdurate nothing was accomplished. So that in practice, at the critical moment when the sinking fund was intended to be of most use in protecting the bonds, it proved to be completely ineffective. ^ There were, of course, exception», and the issue of the Lehigh Valley Consolidated Mortgage 45-^ per cent and 6 per cent Annuities of 1873 showed a willingness of one railroad corporation at least to create perpetual debt. |
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