Obtaining bond interest is the main purpose of investing in bonds. After the bond fell this time, financial management customers were forced to understand the bond quotation logic, but found that bond quotation, delivery, and settlement were very complicated, and no one came out to explain it clearly.
For example, some investors have doubts. After the financial product is net-valued, how is the debt interest reflected? Is it paid once upon maturity and then reflected in the net worth? Or is it reflected in your daily net worth?
There are even financial managers who, like ordinary investors, are not familiar with the trading rules. The financial manager comforted investors by saying, "The current losses will be made up when the debt interest is received." Is this really the case? How is it possible?
Net value is equal to market price plus income amortization
Suppose there is a product A, which only holds one bond. This bond pays 4% interest at the end of each year. If you really follow what the financial manager said above, your net worth will increase in proportion when you pay interest. So, the net worth will suddenly rise by 4% at the end of every year. How is this possible?
Whether it is financial products or bond funds, we have never seen this trend. This valuation method is called cost method , and is generally not used by financial products .
If this valuation method is adopted, it will be very unfair to customers who only hold the product for a period of time without receiving the due interest. Moreover, before the interest payment date, you can make surprise purchases for arbitrage, disrupting the relationship between net worth and market price. Cost method valuations are only used in exceptional circumstances.
Obviously, the debt interest is amortized into the net worth on a daily basis. Some investors may have questions again. The bond interest is amortized into the net value every day. Isn’t it the amortized cost method?
Let’s take a look at the difference between the two:
Amortized cost method, net value = cost + income amortization
Market value method valuation, net value = market price + income amortization
Whether it is amortized cost method valuation or market value method valuation, both will amortize the debt interest into the daily net value, which is consistent. The difference between
and
is that the market value method is calculated using market price + income amortization, and the market price fluctuates, so the amortized cost method is relatively stable, and the market value method is more volatile.
It can be seen from "Net value = market price + amortized income" that if the decline in market price on that day is less than the amortized income, the net value will also rise. This is the basis for the bond market's decline to have a bottom, and the fundamental reason why bond investment risks are lower than stocks .
Net price quotation, full price settlement
We use simple vernacular to explain the relationship between debt interest and net value. If you want to go deeper, it is also very simple to understand its operating mechanism. The professional terminology can be summarized in eight words, that is "net price quotation, full price settlement".
net price quote . The bond transactions we see are all quoted at a net price, which means that the two factors of the holding time and the debt interest earned are not taken into account in the quoting process. The quotation method of
is more efficient. You don't need to consider too many variables, only the yield to maturity, so it is very convenient and more intuitive when trading.
full price settlement . When completing the transaction and settling the bond, the bond settlement needs to be based on the net price, taking into account the bond interest factor. The seller must obtain corresponding interest for how long it has been held.
For example, if you hold a bond for half a year, and interest will not be paid until half a year later, and you sell it at this time, the buyer needs to pay you interest for the time you have held it. This is only fair.
Let’s look at the recent transactions of 21 interest-bearing treasury bonds 14, which are based on the net price. Through the net price, using the data of coupon interest rate and maturity date, we can quickly calculate the maturity holding yield . But it's much more complicated to calculate using the full price including interest.
The significance of debt interest to debt base and financial management
When investing in bonds, the most important thing is to obtain debt interest. If we break down the income composition of bond funds, we can see that the interest income effect is the most important component.
Whether it is a short-term debt fund or a long-term bond fund , they mainly rely on the interest income effect to obtain income.This tells us an important piece of information: the final return from long-term investment in bonds is roughly interest income.
This is also in line with the logic of investment. The value increase in the bond market is brought about by the inflow of interest. Investors obtain investment income by sharing these interest cash flows .
If the manager is very good and can judge the trend of risk-free interest rates and the changes in the market's interest spreads, he can add leverage at the right time and reduce leverage at the right time, he can increase returns and obtain investment returns that exceed the general level of the market.
But there are very few managers who can do these things. If the level of managers is average, financial products or bond funds will lose points in terms of the treasury bond effect, credit spread effect, and bond type selection effect, and the final return will be even lower than the interest income.
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