Bond Valuation and Influencing Factors

II. Bond Valuation As discussed above, the value of an asset primarily depends on the total cash flows it generates over its entire life cycle, discounted to present value. Thus, bond valuation involves discounting all future interest payments prior to maturity and the principal repayment at maturity to determine their present value. 1. Basic Bond Valuation Model A typical bond pays a fixed coupon rate annually 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, generally set equal to the current market interest rate for investments of comparable risk. 2. Valuation of Level-Coupon Bonds Level-coupon bonds refer to bonds whose interest payments are evenly distributed throughout the bond’s life—e.g., annually, semiannually, or quarterly. Accordingly, the valuation model for level-coupon bonds is based on the coupon payment frequency: coupon amount per period, discount rate per compounding period, and total number of periods (m × n), where m is the number of coupon payments per year and n is the remaining years to maturity. 3. Valuation of Pure Discount Bonds / Zero-Coupon Bonds Pure discount bonds promise to pay the face value at a specified future date, with no interim interest payments; hence they are also called zero-coupon bonds. The value of a pure discount bond is: V = Payment at Maturity × (P/F, R, n). Note: A bond that repays 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 understood how to assess bond value, the most critical part follows: analysis of factors influencing bond value. III. Factors Influencing Bond Value 1. Face Value and Coupon Rate (Direct Relationship) A higher face value leads to a higher bond value; a higher coupon rate likewise increases bond value. (Larger face value and higher rate imply greater total principal and interest, resulting in a higher present value.) 2. Discount Rate (Inverse Relationship) (1) The higher the discount rate, the lower the bond value. (The discount rate reflects the prevailing market interest rate; the higher the current market rate, the lower the present value of future cash flows.) • Discount issuance: When the periodic discount rate exceeds the bond’s periodic coupon rate, bond value face value. (2) The shorter the bond’s remaining term to maturity, the smaller the impact of changes in the discount rate on bond price. Since bond value equals the present value of its future cash flows, as maturity approaches, fewer cash flows remain subject to discounting—and thus the volatility of the present value diminishes. 3. Coupon Payment Frequency Regardless of whether a bond is issued at a discount, at par, or at a premium, increasing the coupon payment frequency raises the bond’s 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.

Legal Practice of Debt Financing: 'Issuing Bonds: Corporate Bonds'

Article 153 The term “corporate bonds” as used in this Law refers to negotiable securities issued by companies in accordance with statutory procedures and under agreements specifying repayment of principal and payment of interest within a prescribed period. Companies issuing corporate bonds must satisfy the issuance conditions stipulated in the Securities Law of the People’s Republic of China. Explanation: This article defines corporate bonds under law and references the issuance conditions set forth in the Securities Law, thereby establishing the foundational legal framework governing corporate bond issuance. Article 154 After the application for issuing corporate bonds has been approved by the department authorized by the State Council, the company shall publicly announce its bond prospectus. The bond prospectus shall specify the following principal matters: (1) Company name; (2) Purpose of funds raised through the bonds; (3) Total amount of bonds and face value per bond; (4) Method for determining the bond interest rate; (5) Term and method for repayment of principal and payment of interest; (6) Bond security arrangements; (7) Issue price and issue commencement and expiration dates; (8) Net asset value of the company; (9) Total amount of outstanding corporate bonds not yet matured; (10) Underwriting institution(s) for the corporate bonds. Explanation: This provision (numbered Article 154 in the 2018 amendment; though its numbering may have changed in the 2023 revision, its substantive content remains unchanged) prescribes mandatory disclosures required in a corporate bond prospectus. In practice, the offering memorandum is prepared in accordance with this article; omission of any statutorily mandated item may render the offering documents incomplete. Article 158 Companies issuing corporate bonds shall maintain a corporate bond register. For registered (named) corporate bonds, the following information shall be recorded in the bond register: • Name (or title) and address of the bondholder; • Date on which the bondholder acquired the bond and the bond’s serial number; • Total amount of bonds, face value per bond, interest rate, and terms and methods for repayment of principal and payment of interest; • Issue date of the bonds. For unregistered (bearer) corporate bonds, the bond register shall record the total amount of bonds, interest rate, terms and methods for repayment, issue date, and bond serial number. Explanation: The bond register system forms a foundational mechanism for protecting bondholders’ rights. In practice, as bonds have become dematerialized and are held in custody by securities depository and clearing institutions, the function of the physical bond register is fulfilled by electronic book-entry systems operated by such institutions; nevertheless, issuers remain legally obligated to retain corresponding records. (II) Securities Law of the People’s Republic of China (2019 Revision) Article 15 Public issuance of corporate bonds must satisfy the following conditions: (1) The issuer maintains a sound organizational structure that operates effectively; (2) The average distributable profit over the preceding three years is sufficient to cover one year’s interest on the corporate bonds; (3) Other conditions prescribed by the State Council. Funds raised through public issuance of corporate bonds must be used strictly for the purposes stated in the bond prospectus; any change in use requires a resolution adopted by the bondholders’ meeting. Funds raised through public issuance of corporate bonds may not be used to offset losses or for non-productive expenditures. Where a listed company issues convertible corporate bonds, it must satisfy the conditions set forth in Paragraph 1 above and also comply with the provisions of Paragraph 2 of Article 12 of this Law—except where, pursuant to the bond prospectus, the listed company effects conversion of the corporate bonds by acquiring its own shares.

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