introduction
2022 has begun, the journey has begun, and the times are advancing. By the end of the third quarter of 2021, the balance of funds invested in the securities market was 3.06 trillion yuan, and the proportion of trusts in the securities market rose to 19.50%, of which the size of the bond market increased by 57.36% year-on-year. Under the general trend of industry transformation, standard trusts, especially bond trusts, have shown strong explosive power, and this article will provide a comprehensive overview of the bond market from the dimensions of bond foundation, bond pricing, bond trading and how to screen bond products.
Bond base
01
A bond is a kind of securities, which is a certificate of creditor's rights and debts issued to investors by various economic entities in society in order to raise funds, promising to pay interest at a certain interest rate on a regular basis and repay the principal when due.
Source: Cedar International Trust
In addition to the basic elements, there may be other elements, such as the issuer's option and the investor's choice. Issuer option means that the issuer has the right to redeem the type of variety at par value on the agreed redemption date, so there is uncertainty about the actual duration of the bond. Investor option bonds mean that investors have the right to sell such varieties back to the issuer according to their par value on the agreed resale date.
02 Bond rating agencies
There are three major rating agencies in the world, and the rating system in China is divided according to the way of standard and P.
03 Bond-related institutions
04 Introduction of bond-related institutions
As can be seen from the above table, there are many trading venues for China's domestic bonds, and there are many regulatory authorities, and the venues and trading venues for China's bond issuance are very scattered. There is also a very important institution, namely the China Foreign Exchange Trading Center.
05 Common bond classifications
Although there are many types of bonds, the large turnover is mainly several kinds of bonds, and other bonds belong to relatively "niche" varieties, and the turnover is not large.
Bond pricing
01 How is the issue price of a bond determined?
For bonds that do not pay interest (also known as zero-coupon bonds), they are generally issued at a discount at the time of issuance, while the bonds that pay interest may be discounted or premiumed when they are issued. Zero-coupon bonds are issued at a bidding price, interest-paying bonds are subject to a bid for a coupon rate, and if the coupon rate has been determined, then the bid price.
There are three ways to auction:
02 Bond prices and yields
Assuming that the cash flow generated by a bond in the future is discounted according to the same discount rate, and it is also assumed that the cash flow generated by the coupon of the bond can be reinvested according to the yield to maturity until the bond matures, then the discount rate is the yield to maturity, a common formula for calculating the price of the bond (yield to maturity):
In the above equation, P is the bond price (full price), n is the number of remaining coupon payments, F is the par value, C is the coupon interest, f is the number of interest payments per year, w is the time until the next interest payment, the amount of interest paid per period is C/f, the amount paid at maturity of the bond is F+C/f, and the YTM is the yield to maturity.
Among them, the relationship between full price and net price: full price = net price + accrued and unpaid interest.
03 Term structure of interest rates
The interest rate term structure refers to the relationship between the yield and maturity period of funds of different maturities at a certain point in time, expressed as a curve, with the horizontal axis being the remaining term and the vertical axis being the yield to maturity.
Take a scatter chart of Treasury yields to illustrate:
Image from the web
It can be seen that in general, the longer the maturity of a bond, the higher its yield. But this law is less pronounced when the period is particularly long. Due to the size of the sample, this law is not absolute, but the market as a whole conforms to this law.
04 Credit spreads
Credit spreads are spreads higher than risk-free interest rates that compensate investors for the risk of default on the underlying asset. We draw the yield curves of different bonds on the same graph to see it more clearly:
As can be seen from the above figure, there is a difference between the yield of CDB bonds with the same maturity time and treasury bonds, which is the credit spread of CDB bonds.
05 Duration of bonds
The concept of duration was first proposed by Frederick Robertson Macaulay in 1938, so it is also called Macaulay duration, which is the weighted average maturity time of bond cash flow.
With PV for the present value, CF for cash flow, and P for the full price of the bond, then:
The basic idea is to discount the cash flow of each period, multiply it by the maturity time of the cash flow in that period, divide by the full price of the bond, and finally add up the results of each period. The duration of the unit is generally a year, and the duration of bonds with a particularly short maturity time is measured in days.
In practice, the correction duration is more often used, and the correction of the Maccaulay duration on the basis of considering the yield is a more accurate measure of the sensitivity of the bond price to the change of interest rates.
If y is used for YTM, then:
Bond trading
01 Participants in bond transactions
At present, the participants in China's bond transactions are mainly institutional investors (including asset management products managed by institutional investors), and the proportion of transaction volume in which natural persons participate is very small. Because interbanks only accept institutional investors to enter the market, and although the exchange accepts natural persons to enter the market to trade bonds, the exchange sets a threshold for qualified investors, and China's bond market has gradually developed into a situation in which institutional investors are the dominant and main body.
An institution involved in bond trading is generally divided into front, middle and back office:
02 How bonds are traded
Bond trading is commonly known as "mouth trading", that is, all kinds of different traders and salespeople, in various communication tools, shouting to sell so-and-so bonds, or collecting so-and-so bonds, or borrowing funds, or out of funds.
In addition to various communication tools, bond trading also has a unique type of intermediary, called currency brokerage companies (currency intermediaries). The monetary intermediary will make an electronic "small blackboard" for each bond in the market, and write the demand and supply information of the bond on the "small blackboard", as shown in the following figure.
Source: wind
Common terms used in trading are:
03 Types of bond transactions
The largest trading volume in the entire bond market is the purchase and sale of spot bonds and repurchase transactions, and the turnover of other transaction types is very small.
How to filter bond-based products
This article originated from Cedar International Trust