4&5I UC-HRLF •^ ^"^ ^"^ i iiiii 1 1 mil III III I Ha !■ lO CNJ O UJ ~ll Vluf Bonc(. ona^ are Sato Invp^rfmontr <3S ^ Why Bonds are Safe Investments Published by BOND DEPARTMENT Harris Trust & Savings Bank Organized as N.W. Harris & Co. 1882. Incorporated 1907 HARRIS TRUST BUILDING, CHICAGO Harris, Forbes & Co. Neiv York Harris, Forbes & Co. , Inc. Boston <- \ ■^ 'rf Copyright 1912, 1917, 1920 by Harris Trust and Savings Bank CHICAGO ^^^■^HE average person perhaps does not J J realize to what an extent he is now ^^■^ indirectly investing in bonds, and en- joying the advantages which bonds have made possible. The insurance company in which he, his family or his property is insured invests its funds largely in bonds. So very likely to a considerable degree does the bank in which he deposits his money. The school where he sends his children has probably been built from the proceeds of a bond issue, as have many of the other public improve- ments of his community, the local electric light plant, the waterworks, the railroads which developed the country nearby, the trolley lines on which he rides, etc. Many of the greatest conveniences of the present day would have been impossible if bonds had not been considered safe investments by a very large number of people. It is the purpose of this pamphlet to explain the elements of safety which have made this class of securities so popular with careful investors. [ 5 ] HARRIS TRUST & SAVINGS BANK, CHICAGO Monroe Street, Near La Salle C 6 ] Why Bonds are Safe Investments ^^fc^HERE comes to almost every prosperous man a time t j when he wishes to know the best way of securing a steady ^^^ income from his accumulated savings without the burden or responsibility of managing property in order to gain this income. The merchant may not wish to put back into his busi- ness all the earnings he gets from it. The farmer realizes how soon his broad acres may be run down through soil-robbing when he rents his property "on shares. " When such a problem arises the thoughtful man casts about him for information on which to act. One of the first things he learns, if he studies the situation carefully, is that there is a wide difference between an income derived from one's own business ability, such as the profit secured from running a store, factory, jobbing house or farm, and the income which is the result of money "working" by itself. In the first case, one must keep up his business responsibilities; in the other, once he has selected a safe investment, practically all he has to do is to collect his income from time to time as it falls due. There is no depreciation of land, buildings, machinery or the like; no insurance payments to worry about; no crop failures to consider. Investment Advice If one wishes to put surplus money away and to receive a steady income from it without bother and worry, the most important thing to consider is how to go about it to select something which, once purchased, will turn out to be a safe investment. Clearly, safety is the first consideration. This means only one thing: the sum of money you invest must be returned to you or your heirs in full at some definite time. Every safeguard to this end must be provided. You should not be satisfied with the [ 7 ] Harris Trust and Savings Bank

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But the security behind the five per cent bond may be so much greater than, that behind the six per cent bond that the five per cent bond, will be more attractive, therefore in greater demand and commanding a higher market price. Also the question whether the interest from the bond is subject to the income tax, affects its price. For example, municipal bonds being free from federal income taxes (See page 19) command a higher price for this reason as well as for their high degree of security. Besides these con- siderations there is the general question of the prevailing price of money in the markets of the world; in other words, general interest rates. Thus, these influences taken together may cause a bond to sell for more or less than its face value, or for exactly that amount (par). That is, one kind of a 31,000 bond may be so attractive that it may sell for 31,080; or as the price would be quoted in percentage, at 108 (at eight per cent premium, or eight per cent above par). Another 31,000 bond may be, for entirely legitimate reasons, less in demand and sell for 3900; or in market terms, at 90 (at ten per cent discount, or ten per cent below par). Income There may be a marked difference between the rate of in- terest paid and the rate of income on the investment in a bond. The rate of interest on any given bond is the same, but the rate of income which the investor receives from his investment in a bond varies according to the price paid, the interest rate specified and the length of time the bond has to run. When a bond is sold below its face, or par, value, in other words at a discount, the rate of income is naturally more than the fixed rate of interest named in the bond, because the interest [ is ] [ 16 ] Why Bonds are Safe Investments is figured on the face value and the investor has not paid the full face value for the bond. On the contrary, when a bond is sold at a premium, or above its face value, the rate of income derived from the investment naturally is less than the rate of interest named in the bond. While the interest on a 31,000 six per cent bond is always 360 a year, the actual percentage of yield or income to the investor is more than six per cent or less than six per cent according as the price paid for the bond is at a discount or a premium. If a bond is bought at a price below its face value, say 97 for a 6% bond of 3100 face value, maturing in three years, not only does the investor receive slightly more than 6%, because 36.00 amounts to a little more than six per cent on 397, but also at the end of three years, when the bond is paid at 100, he gains the difference between 397 and 3100, and this amount (33.00) is included in the "yield" on the investment. It must of course be spread out over the period of the investment and in this example it makes the yield over 7% (approximately 7.12%). Standard tables of figures have been prepared by mathe- maticians and actuaries for use in such transactions which show what is earned on a given bond at a given price. These tables take into consideration the principle of compound interest and involve rather complicated mathematical computations, but the example given in the preceding paragraph serves to illustrate the general principle. Foreign Government Bonds The bonds of leading foreign governments have always been considered among the world's soundest securities, and until the Great War began in 1914 commanded unusually high prices, yielding correspondingly low rates of interest. Before 1914 [ 17 ] Harris Trust and Savings Bank there were comparatively few of these bonds sold in the United States, which until that time had been a borrowing nation rather than a lending nation. Today the United States is one of the greatest lending, or creditor, nations and hundreds of millions of dollars of foreign government securities are held in this country. The rate of interest of these foreign loans now is much more than government bonds usually pay. Some of the recent issues pay as high as 8 per cent. U. S. Government Bonds The interest rate of these bonds ranges from 2 to 4^ per cent. They are issued to supply the government with funds (usually for extraordinary needs) and are payable, principal and interest, from the revenues of the government. They are secured by the simple credit of the country and are free from state and local taxes and with certain restrictions and exceptions, from federal income taxes. During the war over 321,000,000,000 of Liberty Bonds and Victory Notes were issued, which com- prise the bulk of the United States Government obligations outstanding. United States Government bonds are recog- nized as the safest investment in the world. Municipal Bonds Broadly speaking, these are the promises-to-pay of states, counties, towns, cities, school, road and drainage districts and such other corporate bodies as have the power of general taxa- tion to provide for the payment of the principal and interest of the bonds. Such bonds are issued for the purpose of payment for some public work or improvement, such as school or other buildings, fire departments, drainage and water systems, roads, [ 18 ] Why Bonds are Safe Investments parks, sewers, etc. Back of municipal bonds as security is the credit of the community and its power to levy taxes on all the taxable property within the municipality to meet the bond obligations. The record of such bonds is so uniformly good that they are generally considered as "next to government bonds." The names of municipal bonds may vary according to the purpose for which the bonds are issued. Thus a county may issue "court house five per cent bonds," which would in- dicate that the bonds were issued for the purpose of constructing a court house and that they bear five per cent interest. There are several other classes of bonds issued by bodies more or less governmental in character which have been termed municipal bonds but which may not have the chief essentials of municipal bonds. Special assessment bonds and many irrigation bonds are of this character. Such bonds are paid from special assessments or special taxes and not from general taxes on all property. Bonds of such character must be in- vestigated with unusual care, and it is highly important that the investor be assured of the integrity of the house offering such issues payable from special taxes. . The test for a municipal bond is to ascertain whether or not it is primarily payable from taxes on all the taxable property within the municipality whose name it bears, and has been issued in full accordance with the laws of the state in which the municipality is located. Under the rulings of the Treasury Department the income from municipal bonds issued in the United States is exempt from all Federal Income Taxes (both the normal taxes and the surtaxes). For this reason these bonds are particularly adapted to investors with large incomes. Corporation Bonds This class of bonds is issued by railroad, public service and other corporations for the purpose of procuring funds for con- [ 19 ] Harris Trust and Savings Bank structing or extending the company's S3^stem or plant. Such bonds are secured by the credit and earnings of the corporation, in addition, generally, to a mortgage on the property of the company. In considering corporation bonds as investments, a sharp distinction should be made between bonds and stocks. Corpora- tion bonds evidence a loan to a company, whereas stocks are cer- tificates of ownership of the company itself. In the case of bonds the interest rate is fixed and does not vary, whereas with stocks there may or may not be an income, depending on whether the company's business is profitable or not; and when stocks do pay dividends, both the income and the price of stocks may fluctuate widely. Inasmuch as stocks are not promises-to-pay and often are bought to sell at a profit, they are frequently subject to great speculation. On the other hand, properly secured bonds are purchased by investors because of their time- tried safety of principal and steady income. Railroad Bonds form a somewhat distinct class by them- selves among corporation bonds, because most of the better known systems have been in business so long that their future earning capacity, on which money for the payment of bonds depends, can be determined accurately, and the safety of the bonds, therefore, easily established. These usually are issued to provide funds for building, extensions or equipment, and are secured in one way or another by the revenues and properties of the road issuing them. Public Service Corporation Bonds are chiefly character- ized by the fact that they are issued by corporations which render some much needed service to a community, and operate under a special grant or franchise from a city, town, state or similar divi- sion of government. Water, gas, electric light, heat, power, street railway and telephone service are among such public utilities. Bonds issued by companies of this character in well [ 20 ] Why Bonds are Safe Investments established communities have an exceptionally good record for safety, for even in periods of general business depression, the company's earnings maintain a high level because the service supplied is necessary to the community served. Industrial Corporation Bonds issued by corporations with long records of successful operation, supplying public necessities such as food products, steel, electric light equipment, dynamos, telephone instruments, locomotives, freight cars, boilers and similar products, are among the safest investments when properly protected. The kinds of industries involved are so varied in character that it would take too long to enter a technical discussion of the safeguards to seek in this class of bonds. The wisest plan is for the investor to select an invest- ment banking institution of conservative character and be guided by its judgment. Requirements of Safety When a successful investor wishes to avoid risk he has in mind three important requisites of any investment he may choose : First: Security, or safety of the principal invested. Second: Convertibility into cash in case a change of investment be desired, or ready money needed. Third : As high a rate of interest as can be obtained with- out sacrificing either steadiness of income or safety of principal. When one buys bonds from a banking house which has, through wide experience and trained knowledge, made a satis- factory and rigid examination of the property securing the bonds, he is obtaining these requisites in high degree. For example: Safety: Special precautions are taken by the Harris Organization at the time the bonds are issued to see that its own [ 21 ] Harris T r u s t and Savings Bank money is safeguarded, so that when the bonds, in turn, are sold to customers the principal of the investment and the interest thereon shall be safe beyond any reasonable doubt and be paid promptly when due. To indicate more particularly the general safety of carefully selected bonds, the United States gov- ernment accepts many different issues as security for deposits of government funds and postal savings bank funds. A large portion of the assets of national, state, savings and private banks is now invested in bonds. Bonds to the value of hundreds of millions of dollars are now held for investment by the prin- cipal insurance companies of the world. Furthermore, bonds not only are regarded as the most satisfactory form of safe in- vestment for the wealthiest individuals, but are also extensively used for safeguarding the carefully accumulated savings of people of small means. Marketability: One of the greatest advantages of bonds as safe investments is the ease with which, under all ordinary conditions, they may be quickly converted into cash. It is possible to borrow money on a bond bought of the Harris Organi- zation from practically any of the banks of the country, because the bond is so prepared that it is readily recognized and may be used as security for a loan. Again, it is an important advan- tage for the investor, if he so desires, to be able to sell his bonds promptly for cash at current market prices. Serving such a large list of investors as this institution does, it has such a con- stant demand for the kind of bonds it can recommend that the investor has a broad market in which to dispose of his bonds under all ordinary conditions. Steady Income: Finally, the income derived from bonds does not fluctuate, can be counted upon as a definite sum and is paid at regular intervals. [ 22 ] Why Bonds are Safe Investments Choosing Safe Investments When it comes to the final matter of the choice of any par- ticular bond for a safe investment, the investor realizes there are numerous technical points which must be properly understood and investigatedby experts so that the safety of the bond under consideration is assured. Even if he is a man of affairs, well versed in such matters, he probably has neither the time nor the inclination to examine all the minute details of the bond issue. The one real essential in selecting bonds is the recommendation of a responsible and conservative banking house of large expe- rience and trained judgment, having a definite system of safe- guards for investors from the day their money is invested until the final payment of interest and principal. History of the Harris Organization The Harris bond and banking organization, consisting of the Harris Trust & Savings Bank of Chicago; Harris, Forbes & Company of New York; Harris, Forbes & Company, Inc., Bos- ton, and the Harris Safe Deposit Company of Chicago, whose combined resources on January 1, 1920, were approximately 375,000,000, was founded in 1882 by Norman Wait Harris. Mr. Harris had been secretary and manager of the Union Central Life Insurance Company, and in purchasing investments for that company had learned that the old-fashioned bond brokers did not always obtain complete knowledge of the securities which they offered for sale — the reason being that the brokers' usual commissions were not sufficient to justify all of the ex- penses necessary to investigate fully the details of a security. He had also come to the conclusion that municipal bonds were among the soundest investments that anyone could obtain. So in founding the house of N. W. Harris & Company in Chicago in 1882 he decided to specialize in municipal bonds and not to sell any bonds on commission but to buy them outright. \s [ 23 ] N. W. HARRIS Founder of the Harris Organization [ 24 ] Why Bonds are Safe Investments Mr. Harris also decided, as a basis of his business policy, to make a thorough examination of the security back of every bond, its legality, the value of the taxable property of the issuing Municipality, etc. Later, when Mr. Harris and his associates foresaw the large development in Railroad, Public Service and other sound and well managed corporations together with the increasing stability of their securities, the scope of the business was enlarged to include bonds of this character. Here again was laid down the policy of thoroughly examining the security back of each issue, including not only the relation of the physical value of the property and the amount of bonds outstanding, but also the character of the corporation's management and its future prospects. For this work only disinterested experts of the highest character and ability are employed. The policy of recommending only bonds which have been thoroughly investigated has been maintained through the entire life of the Harris Organization. As a natural consequence this organization has declined to handle, after investigation, many securities which have since proved good, although at the time of investigation they seemed to be insufficiently safeguarded. The Harris Organization prefers to make its mistakes on the side of declining securities which turn out to be properly safe- guarded rather than of purchasing those which may turn out to be insecure. The success of this policy is evidenced by the fact that during its thirty-eight years of existence the Harris Organiza- tion has served over 5,500 banks, bankers and trust companies in connection with their bond investments. In other words, it has acted in the capacity of special expert in choosing bonds for men already financial experts themselves. In this period the Harris Organization has purchased with its own funds more than three billion, five hundred million dollars (33,500,000,000) worth of bonds and notes which have proved safe investments for its customers. u [ 25 ] ALBERT W. HARRIS President Harris Trust & Savings Bank [ 26 ] Why Bonds are Safe Investments Mr. Albert W. Harris, the present head of the Harris Trust & Savings Bank, not only has followed the general policies laid down by his father, but during his active connection with the institution of over a quarter of a century has had a large share in determining those policies. Mr. Harris entered the business in 1888, six years after the founding of N. W. Harris & Company. In 1896 he was made a member of the firm, and when the Harris Trust & Savings Bank was organized in 1907, was elected Vice President. Six years later he was elected President. All other executive officers have been connected with the institu- tion for twenty or more years. Harris, Forbes & Company, New York and Boston (for- merly N. W. Harris & Co.), handle the bond business in the eastern territory. There is no direct financial connection be- tween the Harris Trust & Savings Bank and Harris, Forbes & Company. The two houses, however, sell bonds from a com- mon list and have the benefit of the combined experience of the executives of both organizations. Mr. Allen B. Forbes, Presi- dent of Harris, Forbes & Company, was connected for many years with the Chicago office of N. W. Harris & Co. The present management of the Harris Organization has followed the policies laid down by the founder of the business, and it is gratifying to note that the bond sales for the year ended June 30, 1920, were by far the largest in the history of the organization — over three times what they were ten years ago. The Harris Organization is glad at any time to place its experience and facilities at the disposal of any prospective in- vestor. This will put the investor under no obligation whatever, and the organization is just as glad to talk over an investment of a few hundred dollars as one of many thousands. [ 27 ] The Harris Organization BOND DEPARTMENT Harris Trust & Savings Bank Organized aa N. W . Harris 4 Co. 1882. Incorporated 1907 HARRIS TRUST BUILDING, CHICAGO Harris ', Forbes & Co. Pine Street, Corner William NEW YORK Harris, Forbes & Co. Incorporated 35 Federal Street BOSTON Harris, Forbes & Co. 27 Austin Friars, E. C. LONDON Representatives of Bond Department of Harris Trust & Savings Bank, Chicago St. Louis, Missouri 504 La Salle Building Minneapolis, Minnesota 801 First National Soo Line Building Milwaukee, Wisconsin 700-702 First National Bank Building Louisville, Kentucky 34 U. S. Trust Building San Francisco, California 504 Insurance Exchange Detroit, Michigan 38 Congress Street, West Penobscot Building St. Paul, Minnesota 400 Guardian Life Building Kansas City, Missouri 1006 Scarrit Building Los Angeles, California 1029 Van Nuys Building Correspondent Offices of Harris, Forbes & Co,, New York Philadelphia, Pennsylvania Widener Building Cleveland, Ohio Union Commerce Bank Building Cincinnati, Ohio 2405 Union Central Building Rochester, New York Wilder Building Albany, New York 13 North Pearl Street Harrisburg, Pennsylvania Kunkel Building Hartford, Connecticut 36 Pearl Street Pittsburg, Pennsylvania Commonwealth Building Buffalo, New York Ellicott Square Baltimore, Maryland 211 East Redwood Street Syracuse, New York White Memorial Building Troy, New York 11 State Street Wilkes-Barre, Pennsylvania Second National Bank Building Washington, District of Columbia 603 Hibbs Building Correspondent Offices of Harris, Forbes & Co., Inc., Boston Springfield, Massachusetts Third National Bank Building Toronto, Canada King and Yonge Streets C. P. R. Building Montreal, Canada 21 St. John Street [ 28 ] *!* *o<^ nl ■ i