It is here proposed to explain the mode in which the exact cost of a security can be determined apart from any fraction of interest which its price may include; the rate of return which is realised in proportion to the price which has been paid; the nature and effect of the symbols x d. and x in. when attached to market quotations, and the manner of computation, with the use, of sinking funds.

I. Accrued Interest As Affecting The Cost Of Securities

The purchaser of stock is a creditor of the Government, railway or corporation issuing the bonds.

The explanation will be simplified if we regard the investor in his true position. When, for example, he has purchased stock from the nation (Government securities), or the debenture stock or shares of a railway, or the bonds of a municipal corporation, he is customarily termed the owner of the security. But his real position is that of a creditor of the Government, the railway company, or the corporation. When the Government, company, or corporation first borrowed money by issuing these acknowledgments of indebtedness, certain persons made the advances, and received certificates or bonds in exchange as evidence of the loans; one after another these securities passed by sale through a series of buyers, each of whom thus occupied the position and acquired the rights of the original lender, and the last purchaser at any moment becomes the actual creditor himself. What he possesses is a debt (based upon value) expressed in the bond or other document issued by the borrower and bearing interest. The loan means that the lender (or the successor in title of the original lender) has surrendered in a particular direction the personal use of money which he might have employed in other modes; and, as the consideration for this specific use, the debtor undertakes to pay a certain rate of remuneration, or a share of the profits which the employment of this money earns. Until the debt is discharged the lenders possess in common the security of the resources of the country in the one case, the net annual revenue of the railway, or the revenue from the taxable land and buildings administered by the corporation.

The Growth Of Interest Is Continuous And Uninterrupted

As the use of the loan is continuous and uninterrupted in aiding to produce the revenues of the debtor - a daily use, so to speak - so is the growth of the interest which is paid upon it, since the exchange is one of exact equality. Interest, that is to say, accrues1 or grows from day to day, or really from moment to moment. But as it would be impracticable to make a daily or even weekly payment of interest, the amount is, in practice, paid at longer specific times in each year of use, but, nevertheless, it is growing from instant to instant.

1 Accrue: derived apparently from an Old French word acrcwe, meaning "that which grows up, to the profit of the owner, on the earth or in a wood "; it is used to translate the Latin accrescere, to grow larger.

"Interest Due And Payable," And " Interest Accrued."

If, for example, the interest is payable on the 1st of January and the 1st of July, each payment is termed "Interest due and payable"; but if we take an intermediate point of time - say the 1st of April - we then have an amount of interest (at the specified rate) which has grown from the preceding 1st of January to the date in question (in this illustration the accrued amount would be that for one-quarter of a year); and this fractional (or proportional) portion of the half-yearly interest is termed "Interest accrued," and recognises the fact that interest does not suddenly occur at the settled dates of actual payment, but grows daily, though not discharged except at conventionally-fixed times. If, however, the debt were redeemed between two periodical dates for payment of interest, the amount accrued to the time of repayment from the prior periodical date would be concurrently paid.

An Example Of Accrued Interest Drawn From A Bank's Balance-Sheet

If the reader should examine the balance-sheet of a bank he will discover an example of what is really accrued interest. He will find placed among the liabilities an item entitled "Rebate on Bills not due." On the 30th of September, we will assume, the bank discounted a bill of exchange which one of its customers had drawn for £500 upon a solvent firm for goods delivered, and payable by the firm at the expiration of six months from that date, The process of discounting the bill is to credit the customer's account with its amount (£500), diminished by the interest for the currency or term of the bill at the prevailing rate - if, for example, the rate were 4 per cent the customer would be credited with £490. The bank's half-yearly balance-sheet is prepared on the 31st of December. If, then, in the distribution of its profits for that period the bank used up the entire six months' interest (or £10) which it had charged, the ensuing half-year's account would be improperly depleted of its portion of the discount (as a contribution to profits) for the period intervening between the 31st of December and the date when the bill matures. Hence the bank in respect of the half-year to the 31st of December credits itself only with the discount (or interest accrued) to that date (£5), and debits itself as a liability with the remainder (or £5) for the rest of the term.