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Chapter 26: Senior Securities of Questionable Safety

·         Graham suggests it would be preferable to view low priced bonds as essentially common stocks. A 4% bond selling at 35 would have a maximum possible price appreciation of 200%. The average common stock cannot be held for a greater profit than this without a dangerous surrender to bull market psychology. In viewing a bond as common stock, the investor will better appreciate the risk involved and perform a more intensive examination of the company.

·         This approach would be distinctly unfavorable to the purchase of slightly substandard bonds selling at moderate discounts from par. These together with high-coupon bonds of second grade, belong to the category of “business men’s investments” which are not suitable for investment.

·         Thus bonds trading under 70 would be considered for speculation (providing an opportunity for a profit of at least 50%) and bonds trading above would be ignored. In making such a commitment, the investor should perform the same analysis as for common stocks.

·         A large working capital is much more advantageous to the senior securities than to the common stock. Not only does it make possible the continuance of interest or preferred dividend payments, but it has an important bearing also on the retirement of the principal at maturity.

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