What is a Long Bond?

Long-term bonds are bonds issued by issuers to raise long-term funds. Different countries have different criteria for dividing the term of claims. Generally, short-term bonds are repayment terms within one year, and medium- and long-term bonds or medium-term bonds are more than one year and less than 10 years. Long-term bonds are repayment terms of more than 10 years. The purpose of issuing long-term bonds is mainly to raise construction funds for large-scale projects, municipal facilities and some long-term construction projects. National economic construction bonds issued by China from 1954 to 1958 are long-term bonds. Such bonds have poor liquidity due to long maturity, and it is more difficult for bondholders to convert them into cash. At the same time, due to the effects of inflation, the currency continues to depreciate, which reduces the principal and actual maturity of the bonds and their actual purchasing power. Therefore, as compensation, long-term bonds need higher interest rates to attract investors, and a second In order to keep the issuance of long-term bonds unhindered. Corporate bonds are generally long-term bonds. ^[1]

Long-term bond

Depending on the repayment period, generally speaking, those with a repayment period of more than 10 years are long-term bonds; those with a repayment period of less than 1 year are

Example: Hongguang Company plans to raise 10 million yuan. Among them, 3 million long-term bonds are issued at face value, the coupon rate is 10%, the financing rate is 2%, the preferred shares are issued 2 million yuan, the dividend rate is 12%, the financing rate is 3%, the ordinary shares are issued 5 million yuan, and the financing fee is The rate is 5%, and the first year's dividend rate is expected to be 12%. After that, it will increase by 5% every year. The income tax rate is 40%.

2.Calculate weighted average cost of capital?

Long-term bond

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During the development of the bond market, the energy released by institutional change and institutional innovation is also worthy of attention. E.g

The value of long-term bonds is more sensitive to interest rates than interest rates of short-term bonds; the value of zero-coupon bonds with the same face value is more sensitive to interest rates than the value of interest-bearing bonds.

Sensitivity of bond maturity to bond value

(1) The reason why the bond value fluctuates with the change of the bond maturity is the inconsistency between the bond coupon rate and the market interest rate.

(2) The shorter the bond maturity, the smaller the impact of the bond coupon rate on the bond value.

(3) The longer the bond maturity, the more the bond value deviates from the bond par value. Moreover, the term of premium bonds is more sensitive to bond value than discount claims.

(4) As the bond maturity is extended, the value of the bond will deviate from the face value of the bond.

But the magnitude of this deviation will eventually level off. In other words, the difference in maturity of ultra-long-term bonds has little effect on the value of bonds.

Bond investment decision-making strategy: short-term premium or discount bonds have little impact on decision-making; for long-term bonds, the deviation of the value of premium bonds from the par value is relatively high, which will provide greater fluctuation space for bond market prices Capital fluctuations in investment should be used to gain profits from this volatile space.

2. Sensitivity of market interest rates to bond values

(1) The rise in market interest rates will cause the value of bonds to fall, and the fall in market interest rates will cause the value of bonds to rise.

(2) The sensitivity of long-term bonds to market interest rates will be greater than that of short-term bonds. When market interest rates are low, the value of long-term bonds is much higher than short-term bonds.

(3) When the market interest rate is lower than the coupon rate, the bond value is more sensitive to changes in the market interest rate. If the market interest rate changes slightly, the bond value will fluctuate sharply. When the market interest rate exceeds the coupon rate, the bond value will change to the market interest rate. Not sensitive.

Bond investment decision-making strategy: The value of long-term bonds fluctuates greatly, especially long-term premium bonds with a coupon rate higher than the market interest rate. It is easy to obtain investment income, but the security is low, and the interest rate risk is large. If market interest rates fluctuate frequently, it is obviously unwise to use long-term bonds to reserve cash, and will pay the price of security for higher yields.