(II) Face Elements of a Bond A bond’s face typically specifies the following elements: face value (the basis for interest calculation and principal repayment; in China, it is generally ¥100), coupon rate (the annual interest as a percentage of the face value), maturity date (the date on which the principal is repaid), interest payment method (e.g., single payment at maturity, annual payments, etc.), issuer’s name (which directly determines credit risk level), and bond name (e.g., “26 Coupon-Bearing Government Bond No. 10”). (III) Characteristics of Bonds Bonds possess four fundamental characteristics: • Repayability (a specified maturity date exists, and the principal must be repaid upon maturity); • Liquidity (bonds can be traded on the secondary market or pledged for financing); • Safety (relative to stocks, bonds offer fixed returns and enjoy priority in claims during liquidation); • Profitability (returns arise from both stipulated interest payments and capital gains/losses from trading). Note that “safety” is relative—credit bonds may still default, and even sovereign bonds may decline in price due to rising interest rates. Differences between bonds and stocks can be clearly understood across six dimensions: | Dimension | Bond | Stock | |-------------------|-------------------------------|---------------------------------| | Nature of Right | Evidence of creditorship | Evidence of ownership | | Relationship with Issuer | Creditor–debtor relationship | Shareholder–company relationship| | Principal | Repaid at maturity | Not repaid; transferable only | | Return | Predetermined interest; relatively fixed | Dividends + capital gains; uncertain | | Priority in Liquidation | Senior to stocks | Subordinate to bonds | | Participation in Management | No right to participate | Right to participate in major decisions | (IV) Classification of Bonds Bonds may be classified along multiple dimensions; the most commonly used classification in practice is by issuing entity: government bonds, financial bonds, corporate bonds, and enterprise bonds. Additional cross-classifications include: • By interest payment method: discount bonds (issued below face value and redeemed at face value at maturity—the difference constitutes interest), coupon-bearing bonds (interest paid periodically; the dominant type in China), and cumulative-coupon bonds (interest accumulates and is paid in full at maturity); • By interest rate structure: fixed-rate bonds vs. floating-rate bonds; • By maturity: short-term (≤1 year), medium-term (1–10 years), and long-term (>10 years) bonds; • By offering method: public offerings vs. private placements; • By security: secured bonds (backed by mortgage, pledge, or guarantee) vs. unsecured (credit) bonds; • By embedded options: callable, puttable, and convertible bonds. II. Government Bonds Government bonds are debt instruments issued by governments to raise funds, backed by government credit—the highest credit rating among all bond types. In China, government bonds comprise two tiers: central government bonds (i.e., treasury bonds) and local government bonds. (I) Treasury Bonds Issued by the central government (represented by the Ministry of Finance) and backed by national credit, treasury bonds are widely known as “gilt-edged bonds,” carrying theoretically the lowest default risk among all bond categories. In China, treasury bonds are divided into two types based on circulation method: | Type | Target Investors | Tradable? | Key Features | |--------------------------|--------------------------------|----------------------------------|------------------------------------------------------------------------------| | Book-entry Treasury Bonds | Primarily institutions; individuals may purchase via securities accounts | Yes, listed and tradable | Recorded electronically; prices fluctuate with market conditions | | Savings Bonds (Certificate Form) | Individuals | Non-transferable; early redemption permitted | Paper-based certificates; principal and interest repaid in full at maturity | | Savings Bonds (Electronic Form) | Individuals | Non-transferable; early redemption permitted | Electronically recorded; annual interest payments; purchasable via mobile banking |

Bond Valuation and Influencing Factors

II. Bond Valuation As discussed earlier, the value of an asset primarily depends on the present value of its expected future cash flows over its entire life cycle. Therefore, bond valuation involves discounting all scheduled interest payments prior to maturity and the final principal repayment to determine their current value. 1. Basic Bond Valuation Model The typical bond pays a fixed annual coupon and repays the principal at maturity. Its basic valuation model is: V (Value) = Annual Coupon × (P/A, R, n) + Face Value × (P/F, R, n) where R denotes the annual discount rate, usually set equal to the prevailing market interest rate for investments of comparable risk. 2. Valuation of Level-Coupon Bonds A level-coupon bond distributes interest evenly throughout its life—e.g., annually, semiannually, or quarterly. Thus, its valuation model adjusts for payment frequency: coupon amount per period, discount rate per period, and total number of periods = m × n (where m = number of payments per year, and n = years to maturity). 3. Valuation of Pure Discount Bonds / Zero-Coupon Bonds A pure discount bond promises to pay its face value on a specific future date, generating no interim interest income—hence also called a zero-coupon bond. Its value is: V = Amount Payable at Maturity × (P/F, R, n) Note: A bond paying both principal and accrued interest in a single lump sum at maturity is effectively a pure discount bond—except that the final payment equals the sum of principal plus accumulated interest, rather than just the face value. Having established the valuation methodology, the most critical part follows: analysis of factors influencing bond value. III. Factors Influencing Bond Value 1. Face Value and Coupon Rate (Positive Correlation) Larger face value → higher bond value; higher coupon rate → higher bond value. (Greater face value and/or coupon rate yield larger total cash flows, resulting in a higher present value.) 2. Discount Rate (Negative Correlation) (1) Higher discount rate → lower bond value. (The discount rate reflects current market interest rates; higher market rates reduce the present value of future cash flows.) • Discount issuance: occurs when the periodic discount rate > periodic coupon rate → bond value face value. (2) Shorter bond maturity → smaller impact of discount rate changes on bond price. Since bond value equals the present value of its future cash flows, as maturity shortens, fewer cash flows remain subject to discounting—and thus their present values become less volatile. 3. Interest Payment Frequency Regardless of whether a bond is issued at a discount, at par, or at a premium, increasing the payment frequency raises its value. For continuously paying bonds, assuming a constant discount rate, the bond’s value converges toward its face value as maturity approaches—reaching exactly the face value on the maturity date, irrespective of whether the discount rate is above or below the coupon rate.