The opening-up of the bond market proceeds mainly through three channels: • Bond Connect’s ‘Northbound Trading’ — overseas investors trade bonds in China’s interbank bond market via infrastructure connectivity between Hong Kong and the mainland. In August 2026, its monthly trading volume reached RMB 803.9 billion, with an average daily turnover of RMB 38.3 billion; by month-end, 844 overseas investors had entered the market. Among the bonds traded, policy bank bonds accounted for 58%, government bonds for 22%, and 7–10-year maturities made up 51%—indicating stronger overseas investor interest in medium- to long-term instruments. • Swap Connect — enables overseas investors to participate in RMB interest rate swaps in the interbank market to hedge interest rate risk. In August 2026, the Northbound Swap Connect recorded 906 trades, with a total notional principal of RMB 543.101 billion; cumulatively, 99 overseas institutions had entered the market. • Direct Market Access — overseas institutions may enter the interbank market directly via the settlement agent model. As of end-May 2026, there were 633 such institutions (counted on a legal-entity basis). As of end-March 2026, the custodial balance of overseas institutions in China’s bond market stood at RMB 3.2 trillion, representing 1.6% of the total custodial balance in China’s bond market. Though this share remains modest, both growth potential and strategic significance are substantial. Section IV: Bond Valuation I. Principles of Bond Valuation The core idea underlying bond valuation is simple: a bond’s intrinsic value equals the sum of the present values of all its future cash flows. Where: = bond’s intrinsic value; = coupon payment in period ; = face value; = discount rate (typically the market interest rate or the investor’s required rate of return); and = remaining number of periods. This formula reveals two fundamental pricing principles: 1. Bond prices move inversely with market interest rates — when market rates rise, the discount rate rises, reducing the present value of future cash flows and thus lowering bond prices; conversely, bond prices rise when market rates fall. This is the first ironclad rule for understanding bond investment. 2. Longer maturity implies greater price sensitivity to interest rate changes — for an identical change in interest rates, long-term bonds experience larger price fluctuations than short-term bonds. This is the conceptual origin of duration. II. Key Determinants of Bond Value Factors affecting bond value fall into two categories: internal and external. (A) Internal Factors Factor Direction of Impact Maturity Longer maturity increases exposure to interest rate volatility and reduces price certainty. Coupon Rate Higher coupon rate generates larger interim cash flows, lowering price sensitivity to interest rate changes. Call Provision A call option benefits the issuer but disadvantages investors, thereby reducing bond value. Tax Treatment Tax-exempt bonds yield higher after-tax returns; tax adjustments must be incorporated into valuation. Liquidity Greater liquidity lowers required liquidity premium, raising bond value. Credit Rating Lower credit rating demands higher credit risk premium, increasing the discount rate and lowering value. (B) External Factors • Market Interest Rates — the most critical external variable, moving inversely with bond prices. • Inflation — rising inflation expectations push up nominal interest rates, depressing bond prices. • Exchange Rates — for foreign-currency bonds, exchange rate fluctuations directly affect investors’ domestic-currency returns. III. Bond Quotation vs. Actual Payment Price Bond quotation and actual payment price are two distinct concepts, differing by accrued interest. Why distinguish between clean price and quoted price?

I. Bond Financing: Borrowing from the General Public In addition to borrowing from banks, enterprises can raise funds from the general public by issuing bonds. Ordinary individuals may also purchase corporate bonds — buying a bond is equivalent to lending money to the enterprise. Bond maturities differ, and accordingly, different accounting accounts are used: Maturity Account Used Within 1 year Trading Financial Liabilities Over 1 year Bonds Payable 📌 Analogy: Purchasing government bonds means lending money to the state; purchasing corporate bonds means lending money to a company. II. Core Challenge in Bond Issuance: Coupon Rate vs. Market Rate • Basic Concepts • Bond face elements include par value (e.g., RMB 100), coupon rate (e.g., 8%), and term (e.g., 5 years). • The central tension lies in the fact that the stated coupon rate on the bond often differs from the prevailing market interest rate at issuance. • Three Issuance Scenarios • Par Issuance: When the coupon rate equals the market rate, the bond is issued at par (face value). • Premium Issuance: When the coupon rate exceeds the market rate, the issue price is above par. • Discount Issuance: When the coupon rate is below the market rate, the issue price is below par. • Pricing and Redemption Mechanism • Theoretical issue price = present value of future coupon payments (as an annuity) + present value of the maturity principal, discounted at the market interest rate prevailing at issuance. • Redemption at maturity follows strict standards: principal is repaid exactly at par (e.g., RMB 100), and interest is calculated strictly as “par value × coupon rate”, irrespective of the investor’s purchase price. • The essence of premium/discount: The price difference at purchase is not refunded at maturity but is realized over the holding period as part of the investor’s return. A discount represents capital gain; a premium reflects prepayment of excess interest. • True Return: Yield to Maturity (YTM) • Key conclusion: For investors holding to maturity, their return is locked in at the market interest rate prevailing at the time of purchase—not the coupon rate. • YTM Formula: • P: Purchase price (issue price or secondary-market price) — determined by the market • C: Periodic coupon payment (par value × coupon rate) • F: Face value • YTM: True annualized return • Role of the coupon rate: It determines only the structure of cash flows (i.e., how much interest versus capital gain/loss), not the total return. • Three Critical Preconditions for Return Lock-in 1. Holding to maturity without reinvestment consideration: If coupon income is reinvested, total wealth accumulation will also depend on subsequent market interest rate movements. 2. Fair market pricing: In the absence of special factors, YTM equals the market interest rate; if credit risk, liquidity differences, or other special features exist (e.g., government guarantees, liquidity premiums, or tax advantages), YTM = market interest rate + risk premium. 3. No early sale: If sold before maturity, the realized return depends on the market interest rate at the time of sale (reflected in the bond price), not the rate at purchase. Question: What happens if market interest rates decline during the holding period until maturity? One-sentence conclusion: Absolute cash flows remain unchanged; YTM remains locked in; relative to new entrants, the investor holds an advantage; however, reinvestment yields a real loss; and capital gains are forfeited.