Graham and Dodd, Security Analysis Chap 5: Survey and Approach

This is typically a short chapter discussing about the difference between bonds and stock by the gurus.

They have identified that many investors regard bonds as a safe investment which leds to investor to believe that bonds carry assurance against loss.This line is extracted from the book: Safety depends upon and is measured entirely by the ability of the debtor corporation to meet its obligations

They stated that bonds are not consider to be safe if it does not have these critera:
Good earning power of a company
A business with abundant of assets

A bond bought at a low price works like a common stock due to its coupon payments which act like dividends & the appreciation of bond price to par is the same as a common stock with its value appreciating

A bond bought with at high price, callable or convertible is not consider as safe investment as these may be some of the possibilities that an investor might face:

1. investor may overpay for the bonds
2. the calling of the bonds by the issuer can force the investor to look another investment & put a stop to his recurring income
3. lastly, the investor faces reinvestment risk as when his bonds are called, he is force to invest his capital at a lower rate