The opening-up of the bond market proceeds mainly through three channels: 1. Bond Connect’s ‘Northbound Trading’ — overseas investors trade bonds in China’s interbank 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 traded bonds, policy bank bonds accounted for 58%, and government bonds for 22%; bonds with maturities of 7–10 years comprised 51% — indicating stronger overseas investor interest in medium- to long-term instruments. 2. Swap Connect — enables overseas investors to participate in RMB interest rate swaps in the interbank market to manage interest rate risk. In August 2026, the ‘Northbound Swap Connect’ recorded 906 transactions, with a total notional principal of RMB 543.101 billion; cumulatively, 99 overseas institutions had joined the program. 3. Direct Market Access — overseas institutions may enter the interbank market 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 of 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: denotes the bond’s intrinsic value; denotes the interest payment in period ; denotes the face value; denotes the discount rate (typically the market interest rate or the investor’s required rate of return); and denotes the number of remaining 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, falling rates raise bond prices. 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 principle underlies the concept of duration. II. Fundamental Factors Affecting Bond Value Factors influencing 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 rates generate 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 applied during valuation. Liquidity Better liquidity lowers required liquidity premiums, increasing bond value. Credit Rating Lower credit ratings demand higher credit risk premiums, raising the discount rate and lowering value. (B) External Factors • Market Interest Rates — the most critical external variable; moves 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?

Bond valuation and influencing factors

II. Bond Value Assessment As previously discussed, the value of an asset primarily depends on the magnitude of cash flows it generates over its entire life cycle, discounted to present value. Thus, bond value assessment involves discounting each periodic interest payment prior to maturity and the final principal repayment, to compute their current value. 1. Basic Bond Valuation Model A typical bond pays a fixed coupon annually and repays 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 A level-coupon bond pays interest evenly throughout its life. Payment frequency may be annual, semiannual, quarterly, etc. Accordingly, the valuation model for level-coupon bonds is based on payment frequency: coupon amount per period, discount rate per compounding period, and total number of periods = number of payments per year (m) × years to maturity (n). 3. Valuation of Pure Discount Bonds / Zero-Coupon Bonds A pure discount bond promises to pay its face value on a specified future date. It yields no periodic interest and is therefore also called a zero-coupon bond. Its value is: V = Payment at Maturity × (P/F, R, n) Note: A bond paying principal plus accumulated interest in a single lump sum at maturity is effectively a pure discount bond — except that the final payment equals the sum of principal and interest, rather than just the face value. Having established the methodology for valuing bonds, the most crucial part follows: analysis of factors affecting bond value. III. Factors Affecting Bond Value 1. Face Value and Coupon Rate (Positive Relationship) Larger face value → higher bond value; higher coupon rate → higher bond value. (Greater face value and higher coupon jointly increase total principal and interest, resulting in a higher present value.) 2. Discount Rate (Inverse Relationship) (1) Higher discount rate → lower bond value. (The discount rate reflects prevailing market interest rates; higher current market rates reduce the present value of future cash flows.) • Discount-Issued Bonds: When the periodic discount rate exceeds the bond’s periodic coupon rate, bond value face value. (2) Shorter maturity reduces the impact of discount rate changes on bond price. Since bond value equals the present value of its future cash flows, as time to maturity shortens, fewer cash flows remain subject to discounting — hence smaller fluctuations in present value. 3. Payment Frequency Regardless of whether a bond is issued at a discount, at par, or at a premium, increasing the coupon payment frequency raises its value. For continuously paying bonds, assuming a constant discount rate, bond value converges toward face value as maturity approaches — reaching exactly face value on the maturity date, irrespective of whether the discount rate is above or below the coupon rate.

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