ABSTRACT
The loans to a Government or a company may be either terminable or perpetual. In the case of terminable loans, the borrower undertakes to repay the capital at par on a given date. The 1917 5 per cent. British War Loan is repayable between 1929 and 1947. Companies seldom so contract for repayment. If, therefore, the holder of perpetual stock wishes to get back his capital or the holder of loan shares wishes to do so before the due date, he must find someone who is willing to buy his shares. With a well-known company it will be easy to do this through the machinery of the Stock Exchange, though it may not be so easy in the case of the shares of small companies which are not dealt in on the Stock Exchange. The investor will not, however, necessarily obtain £100 for £100 stock. The buyer will ask : “ Is the stock perfectly safe and what is the rate of interest paid ? ” Supposing the rate of interest is fixed, then the higher it is the larger the sum for which £100 stock will sell. It will be found that the interest yielded on money invested will be approximately the same amount as could obtain by buying some other stock of about equal security, though the nominal rate of interest varies. For example, supposing the 4 per cent. Debenture Stock of Railway Company A
stands at 80, it will be found that the 3 per cent. Deben tures of Railway B (an equally prosperous concern) will stand at 60. Both stocks, therefore, yielding 5 per cent, to the new investor.
