Chapter 16 Graham teaches the reader about convertibles rank as investment opportunities or risks and how they impact the value of the related common stock. Ideally a convertible lets an investor protect a bond or preferred stock, and gives the opportunity to participate in any rise of the value in common stock. The issuer can raise capital at a given interest or preferred dividend cost, if the value is realized, they can get rid of the senior obligation by converting it to common stock. While this is the theory behind convertibles, Graham points out the flaws. In exchange for the conversion privilege, the investor usually gives up something like quality, yield or both. The company that issues the security gets money at a lower cost by calling in debt, converting to common. However, because of that, it then must surrender part of the common shareholder’s claim to future enhancement. Graham points out how this best of both worlds view of convertibles is too oversimplified and often does not reflect how things actually are. Graham explains buying convertible preferred stock, rather than common, is logical, people that have bought convertible preferred despite not having bought common in the first place, but in a …show more content…
Graham’s ideal combination is: strongly secured convertible, exchangeable for common stock, and at a price that is only slightly higher than the current market. Chapter 17 Graham uses a variety of companies as examples for different investment situations: Penn Central, LTV Inc., NVF, AAA Enterprises. Chapter 18 Graham makes 8 different comparisons in this chapter to show the process of choosing the better investment. Comparison 1: Real Estate Investment Trust and Realty Equities Group of New York. Comparison 2: Air Products and Chemicals and Air Reduction Co. Comparison 3: American Home Products Co. and American Hospital Supply