English
Back
Open Account
What skills should be mastered in bond investment?
投基商学院
joined discussion · Mar 24, 2020 16:42 ·

Mastering the Bond Market | Bond Prices

Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses.
However, this remains at the theoretical stage. In theory, the face value of a bond equals its price. However, in practice, due to factors such as supply and demand dynamics and market interest rates, the market price of a bond often deviates from its face value. In other words, while the face value of a bond is fixed, its price frequently fluctuates.
Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices
So what mysterious forces specifically influence bond prices? A myriad of factors immediately come to mind for NiuNiu – coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlook, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity alone is enough to discourage further study.
In reality, the most significant force driving changes in bond prices stems from fluctuations in market interest rates. Generally speaking, there is an inverse relationship between interest rates and bond prices – when market interest rates rise, the prices of existing bonds fall; conversely, when market interest rates decline, the prices of existing bonds increase.
Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices
This might not be easy to understand, so NiuNiu will once again sacrifice himself as an example to help everyone grasp the concept.
1） Bid Price / Ask Price
The market price of a bond excluding accrued interest. Prices provided by each market maker may differ. For example, China Evergrande bonds:
Bid Price: $96.711 USD refers to the price at which a client sells their bonds to the market maker.
Ask Price: $97.795 USD refers to the price at which a client buys bonds from the market maker.
It is important to emphasize that the bid/ask prices here are merely reference prices. Since bonds are traded over-the-counter (OTC), placing orders based on these reference prices does not guarantee execution. Patience is required to wait for counterparties willing to trade at these prices.
Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices
At the beginning of the year, Niu Niu purchased a one-year corporate bond with a face value of 100 yuan and a coupon rate of 5%, while the bank deposit rate at the time was 3%. Upon maturity after one year, Niu Niu will receive a total of 105 yuan, including both principal and interest.
One month later, Niu Niu suddenly needed to urgently use the 100 yuan and decided to sell the bond. However, at this point, the bank interest rate had risen to 5%. With similar returns from banks and bonds, naturally no one would be willing to take on the risk of purchasing Niu Niu’s bond.
In urgent need to sell, Niu Niu had to sell it at a discount.
As a result, when interest rates rise, bond prices fall instead.
While a decline in interest rates is traditionally considered unfavorable because yields on conventional financial products would generally decrease, the situation in the bond market is quite the opposite.
Indeed, there seems to be a mysterious force at work in the bond market...
2） Accrued Interest
If A sells the bond to B, B will receive the full next interest payment on the bond. Therefore, B must compensate A for the accrued interest.
Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices
3） Full purchase price / full selling price
Full purchase price / full selling price = Clean purchase price / clean selling price + Accrued interest
Full selling price: The price you pay to buy a bond from the bank, including accrued interest. Multiply this price by the principal and add transaction fees to determine the total amount payable for purchasing the bond.
Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices
Each coupon payment received while holding a bond represents compensation for the return earned during the holding period.
For example, Baidu's corporate bonds have an interest rate of 3.62%, with coupons paid semi-annually every six months.

The last coupon payment was on July 6, 2020, and the next is scheduled for January 6, 2021. Assume the bond is traded on September 6.

Are you feeling completely baffled after clicking on this article? Isn't the bond price clearly stated in the product prospectus? Does it really fluctuate? Congratulations, it seems that you have fully grasped the concept of product prospectuses. However, this remains an ideal scenario. Theoretically, a bond's par value is its price. In practice, however, due to factors such as supply and demand dynamics and market interest rates, the bond’s market price often deviates from its par value. In other words, while the par value of a bond is fixed, its price frequently changes. So, what mysterious forces specifically influence bond prices? Numerous theories immediately come to mind—coupon rate, profit expectations, time to maturity, creditworthiness, economic and inflation outlooks, supply and demand, future monetary policy, risk appetite, speculative factors... The complexity is enough to discourage any enthusiasm for learning. But in fact, the driving force behind bond prices

Thus, the investor purchasing the bond on September 6 will be entitled to receive the full semi-annual coupon payment on the next payment date, January 6, 2021.

However, during the period from July 6 to September 6, the bond was held by the previous investor, who should receive the interest accrued for those two months.

Therefore, at the time of the bond’s trade on September 6, the buyer must compensate the seller for the two months’ worth of interest, which amounts toAccrued Interest。

Accrued Interest= Annual Coupon Rate * 100 / 2 * Actual Days from Interest Start Date to Settlement Date / Actual Days from Interest Start Date to Maturity Date.

Assuming a purchase of this bond for 100 yuan today at a price of 110 (clean purchase price), then:

Accrued Interest= 100 * 3.62% / 2 * 60 / 180 = 0.6033 yuan

Full Purchase Price = 110 + 0.6033 = 110.603 yuan.
Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
Dizzy
2
Respect
3
Thumbs Up
6
7486 Views
Report
Comments (3)
Write a Comment...
3
11
8