value
Bond safety is coverage, not yield
The rule
A bond is safe if profit covers its interest many times over, tested across years. The interest rate alone tells you nothing.
Where it flips
But strong cover from a single good year can flatter an up-and-down borrower. The fix is to test the cover across several years, including the weak ones, before trusting it.
The right question about a bond is not "what does it pay?" It is "how easily can the company keep paying it, even in a bad year?" Graham checks safety by how far profit sits above the interest owed, tested across several years. It is the same margin-of-safety idea, now applied to lending your money.
A worked example
A firm earns ₹500 crore and owes ₹50 crore in interest, so profit covers it ten times over. That is sturdy. Another earns ₹120 crore against ₹90 crore of interest, barely once over. One bad year could threaten its payment. [illustrative]
How to spot it
- ·interest covered comfortably many times
- ·cover tested across years, not just one
- ·safety judged by cover, not by the rate
Benjamin Graham · The Intelligent Investor