EXCHANGE

443. Exchange is a system of paying debts in distant places by means of drafts.

444. A Draft, or Bill of Exchange, is an order of one party directing a second party to pay a third party a certain sum of money at a certain time.

445. There are two kinds of bills of exchange, domestic and foreign.

446. A Domestic Bill of Exchange, sometimes called an inland bill of exchange, is one drawn and payable in the same state or country.

447. Foreign Bills of Exchange are those drawn in one state or country and payable in another state or country.

448. The Face or Par Value of a bill of exchange is the sum of money for which it is written.

Bills of exchange are always written in the coinage of the country in which they are to be paid.

DOMESTIC EXCHANGE

449. Domestic Exchange quoted at a premium is worth the given percentage of the face more than the face.

Domestic Exchange quoted at a discount is worth the quoted percentage of the face less than the face.

(a) Thus, 1% premium means that $1 would cost $1.005. Exchange quoted at 1% discount would mean that $1 would cost $.995.

(b) When Boston owes New York the same that New York owes Boston, exchange will be at par in both places. When Boston owes New York more than New York owes Boston, exchange on New York will be at a premium in Boston, since there will be more buyers of New York exchange than sellers; and when New York owes Boston more money than Boston owes New York, exchange on New York will sell at a discount in Boston and exchange on Boston will sell at a premium in New York.

The general principles of percentage (pars. 242–254) are used in solving problems in exchange.

NOTE. For practice problems in domestic exchange see pars. 75 to 80 inclusive.

FOREIGN EXCHANGE

450. Foreign Exchange is exchange drawn in one country and payable in another country.

Foreign bills are always made in the coinage of the country where they are to be paid.

451. The Intrinsic Par of Exchange is the actual value of the money of one country expressed in the money of another.

Intrinsic value of foreign money expressed in the money of the United States will be found in the table, par. 468.

452. Commercial Rate of Exchange is the market value of the money of one country expressed in the money of another.

(a) This value changes from time to time, according to the demand that may exist and according to the different conditions of commerce that may arise.

(b) The rate of exchange on Great Britain is expressed by giving the market value of a pound in United States money.

(c) On France, Belgium, and Switzerland the rate of exchange is expressed by giving the number of francs that may be secured for $1.

(d) On Germany the rate of exchange is expressed by giving the market value of 4 reichsmarks in United States money.

(e) On Holland the rate of exchange is expressed by giving the value of 1 guilder in United States money.

(f) Gold is exported at a profit when the cost of foreign exchange is enough greater than the intrinsic value of the bill to pay the cost of safe shipment and yet leave a margin; and gold is imported at a profit when the cost of exchange is enough less than the intrinsic value of the bill to pay the same expenses and leave a margin. Thus under normal conditions, the commercial rate is not allowed to vary from the intrinsic par by more than enough to pay the expense of shipping gold.

NOTE. For practice problems in foreign exchange see pars. 81 to 85 inclusive.

STOCKS AND BONDS

453. A Corporation is an association of persons authorized by law to act as one person.

454. The Capital Stock of a corporation is the value of its investment. This is divided into equal parts called shares.

455. The Par Value of a share of stock is the value placed upon each share at the time of the original division of its capital stock.

The usual par value of one share of stock is $100. Stock is frequently issued in other sized shares, however, usually $50, $25, $10, $5, or $1.

456. A Stock Certificate is a document issued by the company to the shareholder specifying the number and par value of the shares to which he is entitled.

457. The Market Value of a share is the sum for which it will sell in the open market.

Sometimes stock is worth more than par and sometimes less. This depends upon the condition of the business.

458. A Dividend is that part of the net earnings of a corporation that is divided among its stockholders.

459. An Assessment is a sum levied upon the stockholders to make up losses.

There are two kinds of stock, common and preferred.

460. Common Stock participates in the net earnings of the company, after all other expenses have been met, in such proportion as the directors of the corporation may determine.

461. Preferred Stock participates in the net earnings of the corporation at a fixed rate before any dividend may be declared on the common stock.

462. A Bond is an obligation of a corporation to pay money on a long term of credit.

(a) Bonds are usually secured by deeds of trust and mortgages. They are generally issued as securities for loans. They are similar to promissory notes, but are more formal and are also made under seal.

(b) Bonds are usually issued in $500, $1000, or multiples thereof. (c) Quotations on bonds are given on $100 par value.

(d) Bonds are issued in two classes, registered and coupon.

463. Registered Bonds are those payable to the order of the owner and can be transferred only by acknowledged assignment.

Interest on registered bonds is paid by check from the corporation made to the holder of record.

464. A Coupon Bond is one made payable to the bearer, and has interest certificates attached. These certificates, called coupons, are to be cut off as they