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Reading The Intelligent Investor and came across a passage (pg 48) which I felt I couldn't fully grasp. I'd appreciate it if someone could explain it using simpler language:

Toward the end of 1971 it was possible to obtain 8% taxable interest on good medium-term corporate bonds, and 5.7% tax-free on good state or municipal securities. In the shorter-term field the investor could realize about 6% on U.S. government issues due in five years. In the latter case the buyer need not be concerned about a possible loss in market value, since he is sure of full repayment, including the 6% interest return, at the end of a comparatively short holding period. The DJIA at its recurrent price level of 900 in 1971 yields only 3.5%.

What is the "latter" case here? Is everything after "In the shorter-term" referring to the 5 year government bonds that have 6% interest? Also, are the "state and municipal securities" the same thing as the "government issues"? Contrasting the phrases "shorter-term" and "latter case" seems to indicate that the author is advocating for the 8% corporate bonds in one case and the government issues in the other, but I don't see any mention of the corporate bonds...

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Toward the end of 1971 it was possible to obtain 8% taxable interest on good medium-term corporate bonds, and 5.7% tax-free on good state or municipal securities. In the shorter-term field the investor could realize about 6% on U.S. government issues due in five years. In the latter case the buyer need not be concerned about a possible loss in market value, since he is sure of full repayment, including the 6% interest return, at the end of a comparatively short holding period. The DJIA at its recurrent price level of 900 in 1971 yields only 3.5%.

What is the "latter" case here? Is everything after "In the shorter-term" referring to the 5 year government bonds that have 6% interest?

Yes, but the quote is for US Federal Government bonds.

Also, are the "state and municipal securities" the same thing as the "government issues"?

"State and municipal securities" are not the same thing as US Government Securities. State and Local are State, County, City, Town bonds.

Contrasting the phrases "shorter-term" and "latter case" seems to indicate that the author is advocating for the 8% corporate bonds in one case and the government issues in the other, but I don't see any mention of the corporate bonds...

He is saying the US Gov 5 year bonds are rock solid. There is no fear of losing money. With the corporate bonds there is no guarantee of 100% pay back, that is why the rate is higher.

  • Then do the state or municipal securities come into the picture anywhere in his commentary? – user1340033 Sep 12 '16 at 18:43
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I agree that the paragraph is not well written. It could easily have been put into a more readable table.

When he mentions the 6% on U.S. government issues, he says the buyer need not be concerned about loss, as the US government is considered to be reliable and will repay the investor's capital with certainty. For example, if the US government was running out of money and couldn't afford to repay its investors the money it owes on bonds, it would simply raise taxes to cover its debts. Compare this to a private company; if a private company increases their customer fees to try to pay off their debts, their customers will just get angry and leave (switch to another provider), resulting in a spiral of money problems for the company where they have fewer customers paying their higher service fees.

He mentions the 5.7% tax-free return on good state or municipal securities, but doesn't discuss this further in the paragraph. State or municipal securities are also considered highly reliable for the same reason that the US government is reliable; the state or city can just raise land taxes, parking fees, fees to use the bathrooms, museums and so forth. And the people have no option to pay, unless they choose to move to another state.

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