01. Why buy bonds? What's the difference between it and stocks?

Credit and debt documents issued by the government, financial institutions, industrial and commercial enterprises and other institutions to investors in accordance with legal procedures and agreed to repay principal and interest within a certain period of time belong to a kind of marketable securities. Bonds provide investors with a fixed return and the principal can be recovered at maturity. Compared with the skyrocketing and plummeting stocks, the market price changes less, the expected return is relatively stable and the risk is lower.

Regular interest: bonds usually pay dividends twice a year. The holder of the bond may receive interest on time during the period of holding the bond.

Protect the principal: bonds usually have a clear maturity date, and the issuer will repay the principal on the maturity date.

Risk diversification: adding bonds to your portfolio can help reduce portfolio volatility.

02. Introduction to the types and characteristics of bonds

Fortune will soon launch nearly 20 corporate and financial bonds, providing users with the opportunity to trade bonds online.

03. Bond product description

Take BOC aviation leased bonds as an example:

1）The face value of bondsIt includes two basic contents: currency and par value. The amount that needs to be repaid when the bond matures.

2）Coupon rateThe interest rate of the bond is generally the annual interest rate, which can be obtained by multiplying the face value by the interest rate.

3）Term and interest payment cycleThe term refers to the time between the issuance of the bond and the repayment of the principal. The interest payment cycle can be semi-annual or annual.

4）Bond priceIncluding the issue price and the market price, the issue price is generally in line with the face value.

Market price refers to the transaction price in the secondary market. Each market maker will offer different prices, including buying and selling prices. (similar to foreign exchange trading)

04. Bond transaction

The trading place and mode of the bond secondary market

Unlike the stock market, there is no centralized place for bond trading. The vast majority of stocks are traded through exchanges, while bond trading is divided into two categories: over-the-counter and over-the-counter.

1) Exchange market: relatively small in scale and high in transaction costs.

2) OTC market: the transaction scale is huge, the variety is rich, and the cost is low.

Most of them are over-the-counter OTC transactions.

Mode of transaction:

1) the main transaction mode for individual customers is to complete the transaction through bank and securities firm and telephone inquiry.

2) there are also some securities firms and distribution platforms that have set up electronic transactions, such as FSM,Saxo to provide users with online transactions.

Basic concepts related to transactions

1) net buying price / selling price

Regardless of accrued interest, the market price of the bond. The price offered by each market maker will vary. For example, China Evergrande Group bonds:
Purchase price: $96.711 USD is the price at which a customer sells a bond to a market maker.
Selling price: $97.795 USD is the price at which a customer buys a bond from a market maker.

In particular, it is important to emphasize that the buying / selling price here is only a reference price. Since bonds are traded in the over-the-counter market (OTC), orders placed at the reference price may not be closed, and it is necessary to wait patiently for counterparties who are willing to close the deal at this price.

Suppose Niuniu bought an one-year corporate bond with a face value of 100 yuan at the beginning of the year with a coupon of 5%, while the bank deposit interest rate was 3% at that time. A year after the maturity date, Niuniu will be able to get 105 yuan with interest.

A month later, Niuniu suddenly used the 100 yuan urgently to sell the bond. But at this time, the bank interest rate rose to 5%. The interest rates of banks and bonds are about the same, and of course no one is willing to take the risk to take over bullish bonds.

Niuniu was in a hurry to sell, so it had to be sold at a low price.

As a result, interest rates rise and bond prices fall instead.

It was thought that lower interest rates would not be a good thing, because yields on traditional wealth management products would all fall as a result, but in the bond market it is just the opposite.

Sure enough, there is a magical force in the bond market.

2） Accrued interest

If A sells the bond to BMague B, it will receive the next interest on the bond in full, so B will have to pay the accrued interest to A.

3） Buy full price / sell full price

Full buying price / selling full price = net buying price / selling net price + accrued interest

Full selling price: the price at which you buy a bond from a bank, including accrued interest. Multiplying this price by the principal plus the handling fee is the money you have to pay for the bond.

When holding bonds, the interest allotment received each time is equal to the compensation for the holding period.

For example, Baidu, Inc. corporate bonds have an interest rate of 3.62%. They pay dividends twice a year and pay interest once every six months.

The last interest allocation is July 6, 2020, and the next one is January 6, 2021, assuming it changes hands on September 6.

So those who buy bonds on September 6 will get a full half-yearly interest rate at the next interest rate, January 6, 2021.

But in the past period from July 6 to September 6, it was the previous investor who held bonds, and he deserved the interest allotment for that two months.

Therefore, when the bond is traded on September 6, the buyer will first pay the seller the interest of these two months, that is,Accrued interest (Accrued interest).

Accrued interest= 100 * coupon annual interest rate / dividend frequency * actual days from the last starting date to the delivery date / actual days of the dividend cycle

If you buy 100 yuan of this bond today and the price is 110 (net purchase price), then:

Accrued interest= 100＊3.62%/2*60/180＝0.6033元

Buy full price=110+0.6033＝110.603元。

4) nominal value

Nominal value = par value * number of bonds

In bond trading, the nominal value is used as the quantity to be traded.

For example, if you want to buy 2 bonds with a face value of 100, you are buying bonds with a nominal value of 200.

5) annualized return on maturity YTM

Make the present value of the cash flow generated by the investment equal to the interest rate of the investment price (or cost). Mathematically, the internal rate of return y satisfies the following equation

Cash flow of year t of CFt--

Pmure-the price of the bond bought

Nmura-number of years

For example:

If the purchase price of a bond is 903.10, the maturity is 3 years, the face value is 1000, the coupon is 10%, and the interest payment period is 1 year, then IRR is the y that makes the following equation valid.

6) Market value of position

Market value of client bonds = number of shares of bonds held by clients * (net intermediate price + accrued interest)

05. Why invest in bonds in Futu?

1) Futu supports online bond trading with easy operation and good experience.

2) Futuo charges more favorable fees than traditional traders.