3
Retiring Rural Highway Bonds
nOME AND FARM MAGAZINE SECTION
IN a recently Issued bulletin of the
United States Department of Ag
riculture, entitled "Highway
Bonds," the specialists of the office
of public roads, In collaboration with
Professor James W, Glover, of the
University of Michigan, discuss In
detail the various methods by which
a community, having Issued bonds to
pay for highway improvements, can
most easily meet those bonds at ma
turity. The sinking fund, annuity and
serial bond plans are discussed at
length, with elaborate Interest and
amortization tables, which will en
able the County Commissioners to
determine easily the amount of
money that must be raised yearly,
as well as the total cost of any given
loan.
The following Is a summary of
tome of the conclusions:
Sinking-Fund lionds.
The majority of highway bonds
now outstanding have been Issued as
straight terminable bonds to be re-
the period or term of Issue was re
ported. It will be noticed that the total ex
pense to the community under the
serial plan is somewhat less than
under the annuity plan. The ex
pense by either method Is, however,
considerably less than the expense
under the sinking-fund plan. For
the purpose of comparison the total
expense to the community under each
plan la assembled in the accompanying
table:
It is an unfortunate fact that most
highways do not have a life of 30
years, and it is not quite evident that
the life of the highway and not the
apparent economic term of the bond
should determine the length of the
loan. Many miles of natural soil
roads are annually built by 30-year
bond Issues. There Is usually no
provision for repair and maintenance
charges, and little business organiza
tion In the county road system.
This practice is financially dan
gerous. No gravel road surface can
TOTAL COST OF 9100,000 LOAN FOR 20 YEARS, COMPOUNDED ANNUALLY,
Interest
(Per Cent!
Four. $164,440
Four and one-halt 184.440
Five 174,440
Flv and one-half 184,440
Six. 194,440
-Sinking Fund-
3 Per Cent 3 Per Cent. 4 Per Cent.
tieo.vzu
160.720
170,720
180,720
190,720
$147,160
167,160
177,160
187,160
Annuity.
$147,152
153,762
160,490
167,359
174,369
Serial.
$142,000
147,300
152,500
157,750
163,000
tired by sinking funds. The term
of these bonds varies from 10 to 40
years, with an average of nearly 25
years. The fund to retire these
bonds Is accumulated by annual in
stallments paid by the taxpayers, and
Is supposed to draw interest con
tinuously and to accumulate a suffi
cient amount to discharge the debt
at maturity.
The interest which the sinking
fund draws is usually from 1 to 2 per
cent less than the Interest paid for
the loan. Five per cent highway
bonds are common with the sinking
fund calculated to draw 3 per cent
Interest.
Objections.
There are objections to the sinking-fund
method of retiring highway
bonds. It may not be possible to
obtain continuously the requisite rate
of Interest on the Blnking fund to
discharge the debt at maturity. The
existence of the sinking fund Is a
constant temptation to municipal of
ficers to use It for purposes other
than the purpose originally intended.
If a county, for example, Issues
bonds for a second object, it is easy
to argue that the sinking fund al
ready accumulated may be used to
purchase the new securities and the
finances of the community are in a
way to become much confused. This
Is particularly true since the offi
cers In charge of such operations are
frequently changing. Sinking fund
tax levies may be deferred through
carelessness or under pressure of
other needs.
The sinking fund always requires
Careful attention, because it does not
progress automatically In most cases.
It has sometimes been entirely neg
lected. The total cost of a bond issue
retired by a sinking fund will be
greater In the end than the cost of
the same bond issue made by either
the annuity method or by the serial
method.
Annuity Honda.
By the annuity method of issuing
bonds both the principal and Inter
est are discharged by constant an
nual or semiannual payments. The
amount of each payment or install
ment Is determined by the term of
the bond. It usually Is necessary to
subdivide the bond Issue Into Indi
vidual bonds of (100, $500 or $1000
each.
The resulting periodic payment of
principal and interest must vary
slightly because of this adjustment.
The amount of principal retired Is
small at first and constantly Increases
while the Interest charge decreases.
The sum of Interest and principal re
mains constant, and this Is an ad
vantage, as the tax Is .then uniform,
Serial Bonds.
The serial bond differs somewhat
from the annuity bond, because, in
stead of keeping the annual pay
ment of both principal and interest
constant, the principal alone retired
each year remains fixed. This type
of bond has become more common
for highway purposes In recent years,
and during 1912 and 1913 the num
ber of serial Issues exceeded the
number of Issues for any other sin
gle given term.
The office of public roads received
reports for these two years of $16,
800,819 In serial highway bonds,
which Is over 20 per cent Of the total
County and district bonds tor which
last 30 years, and apparently the only
road surfaces for which a 30-year
life is recorded are surfaces of far
more expensive construction than are
usually built under the bond issues
reported.
There is a further advantage in the
annuity or serial bond for highway
construction, because it Is more like
ly under such a bond that the road
surface will be paid for before it is
entirely worn out. If an annuity or
serial bond begins to mature imme
diately, this Is not considered a seri
ous objection among bankers.
From the nature of the annuity or
the Berial form of highway bonds it
Is never necessary to Issue new or
refunding bonds at the end of the
term. The main advantage, how
ever, of both of these types of bonds
is that the community saves more
money than under the sinking fund
plan because it avoids paying a high
er rate on borrowed money than it
can obtain on money that It loans.
Both the annuity and the serial
bonds have the advantage that they
accomplish with one financial opera
tion all that the sinking-fund type of
bond can accomplish. These types
of bonds are particularly adapted for
financing operations which by their
very nature involve a wasting of the
property.
A highway is In part a wasting
property and It Is desirable to have
established a margin of safety In
highway financing. Railroads fre
quently issue serial equipment bonds
for a period of 10 years with which
to purchase rolling stock. The
amount of bonds required annually
is carefully adjusted so that the re
tirement is faster than the deprecia
tion of the rolling stock. The differ
ence between the outstanding bonds
and the value of the equipment in
any year Is the margin of safety.
In the operation of the annuity
bond both principal and Interest are
discharged by a series of equal in
stallments, usually semi-annual. Each
installment Contains Interest on the
amount outstanding at the beginning
of the interval, and the balance is
applied to retiring the outstanding
principal on the bonds. The effect
of this method is to diminish steadily
the Investment of the purchaser.
If, however, the nominal rate of
Interest paid on the bonds Is not
greater than can be earned by a
sinking fund such as, for example,
with Government bonds and a few
state issues, the borrower might ar
range to set aside In a sinking fund
a portion of each Installment paid,
equal In amount to that devoted to
the reduction of the principal In the
first installment, and the effect would
be to leave the total Investment of
the purchaser undisturbed until the
sinking fund had accumulated to the
amount of the loan.
When the proportion of the install
ment applied to the sinking fund is
thus taken arbitrarily, the term of
the bond is absolutely determined
and a modified sinking-fund plan results.
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Box 3i. 1926 2d At.
Seattle, Wash.
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