HIGHWAY BONDS. 21 



From the nature of the annuity or the serial form of highway bonds 

 it is never necessary to issue new or refunding bonds at the end of 

 the term. Both of these types of bonds have the advantage that 

 they accomplish with one financial operation all that the sinking- 

 fund type of bond can accomplish. The main advantage, however, of 

 both types of bonds is that the community saves more money than 

 under the sinking-fund plan because it avoids paying a higher rate 

 on borrowed money than it can obtain on money that it loans. 



Highway bonds are seldom sold at par. Not infrequently they 

 command a slight premium ; that is to say, they are sold at an advance 

 over the par value. In nearly every State the -law provides that 

 municipal bonds shall not be sold at less than par. 1 When the pur- 

 chaser pays a premium for a 5 per cent highway bond it will yield 

 less than 5 per cent. To enable investors to determine quickly the 

 net rate of yield from a bond purchased at a premium or at a discount, 

 tables known as bond tables have been calculated. In Appendix D 

 is presented a short bond table of this kind (Table 37). From this 

 table the net yield of a bond with a nominal rate of interest of from 3 

 to 6 per cent, payable semiannually and for varying terms, may be 

 calculated for various prices. Thus a 5 per cent 15-year highway 

 bond purchased at 103.20, or with a premium of 3.20 per cent, will be 

 found to yield the purchaser 4.70 per cent on his investment. 2 Such 

 tables are of more important interest to the purchaser than to the 

 municipality offering the bonds, but they are necessary for the intel- 

 ligent direction of the bond issue. 



In calculating the price to be paid for serial bonds, it is customary 

 to treat each series separately and to find the price that yields the 

 given net rate by adding the separate prices. Some formulas will 

 be found, however, in Appendix D which considerably shorten the 

 labor of calculating the price to be paid for serial bonds and the 

 labor of related calculations. 



Special form of annuity bond. — In the operation of the annuity 

 bond both interest and principal are discharged by a series of equal 

 installments, usually semiannual. Each installment contains inter- 

 est on the bonds outstanding at the beginning of the interval and the 

 balance is applied to retire the bonds. The effect of this method is 

 to diminish steadily the investment of the purchaser. If, however, 

 the borrower should arrange to set aside periodically in a sinking fund 

 a fixed sum in excess of the 'periodic interest on the entire issue, the 

 effect would be to leave the total investment of the purchaser undis- 

 turbed until the sinking fund had accumulated to the amount of the 

 loan. When the excess of the periodic installment over the required 

 interest is arbitrarily selected and accumulates at a given rate of 



1 Massachusetts requires the premium to be deposited in the sinking fund. To avoid paying par value for 

 the bonds, bidders frequently bid par or above par and require an allowance for attorney's fees and expenses. 

 2 Cf. Appendix D, page 129. 



