Investing in Corporate Bonds: My Contrarian View

Roger Lowenstein, in his preface commentary found prior to Chapter 1 of Security Analysis, wrote:

“In the 1930s, there was a common notion that bonds were safe— suitable for ‘investment’—while stocks were unsafe. Graham and Dodd rejected this mechanical rule, as they did, more generally, the notion of relying on the form of any security. They recognized that the various issues in the corporate food chain (senior bonds, junior debt, preferred stock, and common) were not so much dissimilar but rather part of a continuum. And though a bondholder, it is true, has an economic, and also a legal, priority over a stockholder, it is not the contractual obligation that provides safety to the bondholder, the authors pointed out, but ‘the ability of the debtor corporation to meet its obligations.’ And it follows that (leaving aside the tax shield provided from interest expense) the bondholder’s claim cannot be worth more

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