Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In these chapters, the authors discuss the characteristics of income and guaranteed bonds, and the criteria for them to be considered as fixed-value investments.Income bonds' position in the capital structure is slightly better or the same as that of the preferred stock as their interest payment is not guaranteed. So, a margin of safety standards for these bonds should be similar to that of preferred stocks. However, such bonds provide a tax advantage to companies which could be a consideration as corporations decide among preferred stocks and income bonds.
For guaranteed bonds, the authors think the financial condition of the guarantor is the most important criterion versus just the name "guarantee". In addition, the terms of the guarantee are important. A guarantee of just interest payment is less valuable than a guarantee of both interest and principal. On the other hand, a bond guaranteed by several large companies is more favorable.
Both real estate mortgage guarantees and leaseholds are forms of guaranteed issues. The authors described the history of the former wherein the industry moved from conservative standards to less conservative only to find out that value of the underlying property matters more than the name "guarantee".
Operating leases are another area where the true obligations of the company were hidden as they were not reported on the financial statements. Thus, a careful investor has to study all supplementary information. Leases should be included in the fixed charges for companies where they are an important part of the operation. For example in retail companies or theater businesses.
Similarly, the bonds of subsidiary companies shouldn't be automatically treated as safe if the parent company is strong unless the parent has assumed direct responsibility for the bond interest and principal payments.
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