4. Value Of Bonds

The value of such bonds depends on the worth of the security on which they rest. Usually the first mortgage bonds of railroads are amply secured, especially of the older railroads, but in some instances railroads have been built almost wholly out of money obtained from bondholders, and in many of these the security was insufficient. Even though afterward taking all the property mortgaged in payment of their mortgage, it proved inadequate.

5. Extension Bonds

The next class of bonds that may be mentioned are extension bonds, which are secured on additional lines built or bought with the proceeds.

6. Division Bonds

The third class are division bonds, which are secured by the property of a division, instead of the entire road.

7. Blanket Bonds

Another kind of bond is sometimes issued called a blanket bond. A railroad company extends by construction, purchase, or lease its lines in various directions, and at length issues a general or consolidated bond on all of its property. This is subject to the mortgages that have been already issued so that it rarely affords much security to the holders. The object of issuing it is to obtain additional means to pay the company's indebted ness, or to pay for other extensions or improvements. When the holders or owners of the prior mortgages foreclose, this is the first mortgage to be cut off. It therefore possesses less value than any other, and usually is one of the last expedients to raise money.

To this remark some exceptions should be noted. Occasionally such a mortgage is issued for the purpose of raising the means to pay off one or more prior mortgages, perhaps all. A geneal mortgage,consequently, may be in effct the conversion of the prior mortgages into another form, bearing perhaps a lower rate of interest, and running for a longer period.

8. Collateral Trust Bonds

Another kind is known as a collateral trust bond. This is issued on the security of other bonds or securities owned by a company which have been issued by other companies. They are deposited with a trust company usually as a trustee or keeper, and the mortgage fully specifies the terms of the trust. It is in effect a loan on collateral owned by the borrower. The trustee has power to sell the securities by virtue of terms stated in the mortgage if the loans thus secured are not paid, and give the proceeds to those for whose benefit they were pledged. Sometimes the mortgage stipulates the minimum price at which the collaterals shall be sold; in short, the mortgage is drawn in a manner to protect as far as possible the interests of both parties. As this is a very extraordinary power to give to trustees, it should be carefully guarded. It hardly need be added that they must exercise it wisely and in good faith, and are liable for the consequences.

9. Collateral Trust Notes

Of essentially the same form of security is a trust note. This always gives the trustee, whether it be a trust or other company, or a committee, authority to sell the collaterals for the benefit of the lenders, without any judicial order or action, while a collateral trust bond sometimes requires judicial authority, or authority outside of the trustee, to sell the collaterals.