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I am an employee of one of the four major banks, and as far as I know—

Operation of wealth management products: Common investment channels include funds, bonds, fixed deposits, and interbank transactions. The vast majority of capital-protected wealth management products are invested in fixed deposits, government bonds, interbank transactions, and money market funds, which have a low probability of principal loss.

Some may ask how those short-term wealth management products with yields of 6% to 7% for a few months can claim to be capital-protected and yield-protected. The channels I can think of are interbank lending and interbank deposits. Because banks have requirements for the loan-to-deposit ratio, they often borrow funds from other banks to ensure they do not violate the regulatory bottom line set by the banking regulatory commission. The amount of funds borrowed from interbank transactions is substantial, and sometimes urgently needed, so it is very common for banks to lend money to other banks at rates of 6% or 7% for three months. This is a common practice in the banking financial institutions' business.

When banks offer such high interest rates to lend out money, they will naturally design wealth management products with slightly lower rates. I believe that every bank of a certain scale has departments similar to financial institutions, which constantly inquire about quotes from other banks by phone every day, and once an opportunity is discovered, they will do everything possible to facilitate transactions (just think about how attractive it is to have hundreds of millions in funds with a decent interest rate. The key point is that, given the current situation in China, bank failures are still unlikely, especially for financial institutions that can participate in interbank lending, which generally have good qualifications and low bankruptcy risks). Sometimes when banks find that other banks have a demand for funds, they will urgently launch some wealth management products to raise funds from depositors and then package them to lend to other banks. Sometimes it may also be that the bank itself is close to the bottom line of the loan-to-deposit ratio, so it will also launch some wealth management products to attract funds from depositors in other banks to put out fires.

I believe that during the "money shortage" period in June, many people received messages from banks claiming that there were numerous wealth management products offering 7% to 8% "capital protection and yield protection." It is rare for the banking industry to experience a widespread money shortage, but it is very normal for a branch of a bank in a certain area to experience a temporary shortage of funds. Thus, interbank lending, interbank deposits, and various hybrid products become profitable.

I come from a corporate business background, so I can only understand this level.

As for the points to pay attention to when buying wealth management products, first, you need to be clear whether they are capital-protected and yield-protected. For the impoverished masses, the safety of the principal is very important, as it is hard-earned money. Secondly, do not be easily misled by those yield rates; it is best to calculate it yourself. For example, when I was managing wealth for the company, I found that some T+1 day products had slightly higher yields compared to T+0 day products. However, after actual calculations, you will find that T+0 products, due to having one more day of interest calculation, actually yield better returns. (To clarify, T+0 products refer to purchases that take effect on the same day; T+1 products refer to purchases that take effect the next day.) Yield rates are just a reference indicator, but actual returns are the wealth we gain from investments. So do not be easily misled by high yield rates, especially for some ultra-short-term wealth management products like 7 days or 14 days, which claim annualized yields of 7% or 8%. If you calculate carefully, you will find that the actual profit is not much.

There are also some good wealth management products with low investment channel risks and stable returns, but due to regulations from the banking regulatory commission, they cannot promise capital protection and yield protection, so bank personnel will not make such promises to you. Of course, you can ask, "Has this product ever lost money before?" If the answer is "no," and if the wealth management product is still one of the bank's signature products, then you can consider it. Especially for large banks, they value their reputation and will not easily sell products with a high risk of significant losses to customers. Here, I want to remind you that I am referring to wealth management products, not funds. Many funds invest in the securities market, so the risks are very uncertain, and the wealth management managers selling funds to customers receive commissions, so they may not be as cautious.

Also, be sure to distinguish between bank wealth management, funds, and insurance. For funds, you need to understand whether they are equity funds, bond funds, money market funds, or mixed funds. Except for money market funds, other funds are generally difficult to provide "capital protection and yield protection," so those who do not understand wealth management should not easily touch them. Nowadays, many insurance products are packaged as "bank insurance products" with particularly high yield rates, so it is essential to understand whether the principal will be returned at maturity.

By the way, there are two points that must be noted. Some wealth management products cannot be redeemed before maturity, so you must ensure that your available funds are sufficient to avoid situations where you cannot withdraw emergency funds, leading to public criticism of the bank. Additionally, some wealth management products automatically renew upon maturity, so you need to calculate the dates in advance; if you do not want to renew upon maturity, you should redeem them.

That's all.

Capital-protected products in bank wealth management, as well as capital protection and yield protection products, are usually accounted for on-balance sheet, meaning that this portion of wealth management funds will be counted as deposits, and thus reserve requirements must be paid. The reserve interest rate set by the central bank is very low, so this portion of income is definitely negative. However, to put it another way, bank wealth management products, except for those linked to derivatives and other complex structured products, the less clearly defined the investment direction is, even if they do not guarantee principal and interest, the safer they tend to be. Why do I say this? Because the banking regulatory commission requires banks to disclose the investment directions of wealth management products and mandates one-to-one investments, but many banks cannot meet this requirement. For example, if they invest in an asset with a five-year term, they might sell you a wealth management product with a three-month term. What happens when that three-month wealth management product matures? Typically, banks will not sell off the asset because it may have no liquidity, so they may adopt a rolling investment approach by renewing the wealth management product. What price will they sell to the next wealth management product? They cannot afford to sell at a loss, otherwise, if investors pursue accountability, how will they handle it? Banks take reputation risk very seriously; if one of their products has a problem, it could lead to a total loss. Therefore, the more they are at fault, the more they have to bear the consequences themselves. This is what it means to "swallow blood after losing teeth."

Looking at the investment direction of wealth management, in the early years, bank wealth management investments were quite singular, mostly in fixed-income bonds, with little leverage, so returns were not high. Later, they began to use trusts to issue trust loans, engage in entrusted loans, etc., which is equivalent to direct financing, thus increasing returns. The banking regulatory commission saw that the business was growing and that risks were hard to control, so they tried various means to issue notifications for regulation. However, with policies from above and countermeasures from below, various channel businesses emerged, whether from securities firms, funds, or insurance trusts, many so-called new products are fundamentally unchanged. Although from a product design perspective, it is possible to use income stratification and leverage to invest in relatively low-risk bonds (the Chinese bond market has unique national characteristics and has never had a substantial default), most banks invest in non-standard assets (the banking regulatory commission created a non-standard concept, which contradicts the later proposed "Kerry Economics" that aimed to guide funds into the real economy, a slap in the face) to maintain high returns, which essentially provides blood supply to government financing platforms, real estate, and other industries. As the original poster mentioned, there are many wealth management funds that directly deposit in the same deposit or lend to each other, and during the Everbright incident this year and at key points at the end of the quarter, the prices were very good, absolutely high returns. However, the price of funds is subject to significant fluctuations; for example, in the first five months of this year, there was not much good market performance. I remember that Agricultural Bank once issued a product linked to SHIBOR, which guaranteed stable interest spreads for banks, and investors need to pay attention to SHIBOR trends before entering. Recently, in the past few months, the medium to long-term SHIBOR has deviated significantly from reality, so it is more appropriate to refer to the interbank market's bond repo rates, which can be checked on the China Foreign Exchange Trading Center website; this is getting off-topic.

Although this question is about high yields in bank wealth management, in reality, for investors, besides bank wealth management, there are also collective wealth management from securities firms, asset management plans from fund companies, asset management plans from fund subsidiaries, trust plans, and many other products available for investment. However, compared to bank wealth management, which usually starts at 50,000, the threshold is relatively low, while trust plans typically start at a million. In the market, various financial institutions also tend to favor the wealthy; the higher the starting point of the wealth management product, the relatively higher the returns. However, when purchasing, customers must ensure they choose legitimate channels and products.

Understanding Money Market Funds#

What knowledge do you need to learn to invest in money market funds? What factors are related to the appreciation and depreciation of money market funds? How do you determine whether to increase or decrease your holdings?

Xu Yinpeng

To speak frankly, from the questions you ask, it seems you are too conservative and too focused on details, which may cause you to lose sight of the main point. Money market funds should never be a labor-intensive financial tool. We should spend our time researching other non-money financial tools. If you feel that even money market funds are unsafe, it seems that only government bonds and fixed deposits are left—bank fixed deposits will show differentiation in the future.

Money market funds are a cash management tool, and they may only be a cash management tool. The emergence of money market funds organically combines safety, liquidity, and profitability, allowing people to obtain certain returns under the premise of very high safety.

The main factors affecting money market funds include the coupon interest of the specific basket of bonds held, short-term market interest rates, the leverage multiple of the money market fund portfolio, the average holding duration (simply understood as the average maturity of the basket of bonds), the degree of market liquidity, the scale of the money market fund, and the composition of the money market fund holders.

For example, the Huaxia Cash Money Market Fund generally sees higher yields during the end of the half-year and year-end due to tighter liquidity, which causes market interest rates to rise, and thus the yield of money market funds tends to be higher. On the other hand, some money market funds with only a few billion in scale may have relatively lower yields; the high returns of Huaxia Cash are somewhat related to its scale of 30 billion. Furthermore, regarding the composition of investors, if individual investors occupy a high proportion of the fund, such as Yu'ebao, which is mostly retail investors, then its scale is relatively easy to maintain stability, which is why we see that Yu'ebao's yield has been the highest among all money market funds since June. Whether it can maintain the top position in the future is uncertain.

As for increasing or decreasing holdings in money market funds, you should decrease when you need money and increase when you have idle funds that you do not need temporarily. No one has ever used money market funds for trading. Strictly speaking, they are not in the investment category; they are merely a cash management tool.

The main investment targets of money market funds are agreement deposits, interest rate bonds, short-term financing, central bank bills, and corporate bonds. To ensure liquidity, the duration of bond varieties in money market funds is generally relatively short.

From the perspective of investment varieties, it is easy to see the related factors of money market funds—benchmark interest rates, market liquidity, etc.

1. The benchmark interest rate determines the cost of funds and the coupon interest rate of bond varieties. When the central bank raises interest rates, the yields of agreement deposits, demand deposits, and floating-rate bonds will rise simultaneously, while the agreed coupon interest of agreement deposits and corporate bonds held by money market funds will still be calculated at the coupon rate before maturity, resulting in some yield loss. However, since money market funds themselves have short holding periods, and when negotiating with current money market fund managers, they often choose floating-rate varieties, so when interest rates rise, the yields of money market funds will rise accordingly, while bond funds will experience short-term declines and long-term increases. The same pattern applies when interest rates fall. Of course, when interest rates fluctuate significantly, you can check the interest rate sensitivity of money market funds to make judgments (the higher the interest rate sensitivity, the higher the elasticity of the fund's net value to reverse changes); generally, the longer the duration, the higher the interest rate sensitivity, and the shorter the duration, the lower the interest rate sensitivity.

2. Market liquidity determines the floating yield of interest rate varieties. When liquidity is tight, the central bank's interest rates may not have adjusted, but interbank SHIBOR reacts significantly, while general floating-rate bonds and large-denomination certificates of deposit are linked to SHIBOR, which is basically consistent with the benchmark interest rate. However, changes in liquidity have a significant impact on the performance differentiation between bonds and money market funds; generally, when liquidity is loose, bond funds yield higher returns; when liquidity is tight, money market funds operate flexibly, and due to increased repo trading operations, their yields outperform bond funds.

In summary, changes in bank interest rates have little impact on holding money market funds, as overall market interest rates tend to rise or fall in unison. However, when market liquidity tightens, if your own risk tolerance is low, it is advisable to buy money market funds.

Here are some recommended money market funds with good management levels:

1. General investors can choose Southern Money Market, Huaxia Money Market, and Hua'an Cash Rich Money Market, all of which achieve T+0 redemption for money market funds, with stable performance and overall high returns, making them the undisputed top three in fixed income.

2. For short-term speculation, consider Wanjia Money Market, Baoying Money Market, China Merchants Money Market, and Tianhong Zenglibao (Yu'ebao), which have good relationships with banks and obtain higher agreement deposit rates during tight liquidity periods at the end of the quarter, generally SHIBOR + 20~30bp, and the concentrated redemption time is fixed, making it easy to achieve high returns in the short term, although performance may fluctuate significantly.

3. For corporate investors with financial management needs, the first choice is E Fund Money Market, which is designed for institutional investors and provides comprehensive related services, making subscription and redemption more favorable for large investors.

If you still have doubts, a simple way to choose a money market fund is to select one with a large scale.

How to purchase trust products?

Xie Jialin

Thank you for the invitation... I see that many friends answering questions earlier are from trust companies. As someone who has spent some time in a third-party company and is still in the industry, I will also answer this question.

The current sales channels for trusts are:#

1. Wealth centers established by trust companies themselves;

2. Trust companies entrust financial institutions to sell on their behalf, such as banks, securities firms, etc.;

3. Trust companies find third-party companies to sell on their behalf (this statement does not comply with legal regulations; it should be that third-party companies recommend trust wealth management products to their investors, while on the trust company side, they recommend clients to the trust company).

Subscription process:

1. Obtain information about trust products from the above three channels, including but not limited to fund direction, risk control measures, duration, expected yield, etc.

2. Determine the product to subscribe to.

3. Subscribe... Normally, investors should see the trust contract, carefully read the contract terms and trust prospectus before signing, and then transfer funds to the designated fundraising account in the contract; however, due to the hot sales of trust products in recent years, in reality, it is often the case that after the trust company determines the fundraising account, investors first transfer funds to subscribe to seize shares, and then sign the trust contract (the transfer account can be confirmed through product information sources or the trust company's customer service hotline), meaning that in practice, there are many cases of transferring funds before signing contracts.

4. Wait for the announcement and confirmation of the establishment of the trust plan (some trust companies do not issue this but will return a notification of funds received).

Currently, there are no restrictions on the registration location in actual operations.

The second question:#

Before the formal issuance of the trust plan, the relevant sales channels already have information about the product other than the fundraising account, and it is common to encounter different products with different expected yields. Different expected yields can reflect the risk of the product to some extent, but this is not absolute and still depends on the product's structural design.

The so-called rigid repayment mentioned by the questioner is a legendary agreement, meaning there is no legal agreement that trust companies must implement rigid repayment to investors. The "Measures for the Administration of Collective Fund Trust Plans" stipulates that as long as the trust company fulfills its fiduciary duties as stipulated in the trust contract, if actual investment losses occur, the investors must bear the responsibility themselves.

Of course, in practice, trust companies, whether for maintaining their reputation or meeting regulatory requirements for guaranteed repayment to maintain social stability, will find ways to properly handle and repay trust projects that encounter problems. This once again reflects the advantages of our socialist system.

However, as long as the trust industry continues to move forward, rigid repayment must and will inevitably be broken, which aligns with the principle of matching investment risks with returns and promotes the healthier development of the entire financial system. (Do not underestimate this point; with a healthy environment, social and economic development can thrive, and we can live more happily.)

Therefore, carefully discern the risks of products and choose those that align with your financial goals without blindly pursuing high returns. In wealth management, safety is the top priority.

The third question:#

Currently, most domestic trust products belong to reverse trusts (an informal term), meaning there is a predetermined use of funds, direction, and yield before finding investors. They are financing in nature. The actual funding needs of the financing party are evident; they cannot do without a certain amount, and having too much is also unnecessary, so they cannot raise funds for financing parties to use. Therefore, in practice, many projects are issued first to see how much can be raised; if the market response is good, the fundraising is completed, and then it is over. If not, a phase is established first, and after a while, fundraising is reopened.

If you really want to invest in trusts, you need to ask the institution that recommends you, as the funds transferred to the fundraising account will only earn interest at the demand deposit rate before the trust plan is formally established. Some investors prefer to keep their funds in money market funds, letting their wealth managers pay attention to the establishment time, so they can subscribe at the last moment before establishment... (Well, some wealthy individuals think this way), this situation can easily lead to extended fundraising times for trust plans... Everyone is waiting and wants to wait until the last moment.

So, once you are sure, just buy it; those who can afford trusts are people who earn big money and do big things, so do not worry too much about these small amounts. Right, wealthy comrades... Sometimes, for high-quality projects, you may miss out just by waiting, and you will have to wait for the next high-quality project to appear. The time cost in between could be better spent enjoying life.

This is my first answer; it may be a bit chaotic, and I may inevitably make mistakes, so I welcome corrections and exchanges.

2013-10-24

Yuan Lu

1. The answer to this question is that both can be purchased; the specific composition of sales channels has been clearly answered by Nanqu Xiongmao.

2. There are differences in the yields of different trust products, and project risk is one of the most important reasons. Many factors affect the yield rate sold to investors, from project type, actual risk, financing party strength, repayment willingness to trust remuneration rates, custody fees, and even sales channel commissions, as well as the average yield rates of similar projects, all of which can have varying degrees of impact. Ultimately, the fundamental reason lies in the fact that trust projects are non-standardized financial products without a unified evaluation standard. Rigid repayment is another unwritten rule concept, equivalent to the project risk being entirely borne by the trust company without being passed on to investors, but this does not affect the trust company’s ability to set product yields based on project risk.

3. The deadline for trust products is very flexible, generally following a first-come, first-served principle, meaning that once the subscription reaches the project financing quota, it will be established. The sooner the funds are handed over to the financing party, the better, as the financing party cannot just wait idly for this funding. Conversely, there may be a situation where a certain trust project hangs online for a while, but the subscription amount still does not reach the expected quota. In this case, there are generally two outcomes: one is that the financing party, eager for funds, has no choice but to settle for a lower amount if the ideal quota is not reached, thus establishing the trust project but at a smaller scale than originally expected; the second is that if the funds are delayed, the financing party has already obtained funds through other channels and no longer needs them, resulting in the trust project being canceled. Therefore, it is normal for trust products to have no deadline; it is still uncertain whether they can be established.

From the perspective of promotional (commonly referred to as sales) channels, trust products have two major channels: 1. Trust companies sell directly; 2. Entrust external institutions to sell.

1. Trust companies sell directly

The "Measures for the Administration of Collective Fund Trust Plans" issued by the banking regulatory commission has set strict restrictions on the refund amounts of trust products, such as prohibiting advertising and not promoting in other locations without filing, etc. Among these, the advertising promotion restrictions have generally been well adhered to (some companies in regions with looser regulations have skirted the rules), while the promotion in other locations has been effectively broken through, and regulatory departments have also tacitly accepted this reality.

Currently, many trust companies have established independent wealth management centers responsible for the sales of their own products and other financial products.

2. Entrusting external institutions to sell

3. Bank channels

According to the "Measures for the Administration of Collective Fund Trust Plans," if a trust company entrusts external institutions to sell, it must entrust financial institutions. In previous years, banks and trust companies collaborated extensively, from project promotion to product sales, so many products were sold by banks. This is legal and compliant.

Changes occurred at the end of last year. At that time, the Shanghai Jiading branch of Huaxia Bank illegally sold private placement products from general companies, which were widely reported as trust products, causing trust companies to be implicated. Later, the banking regulatory commission required that banks must obtain approval from their headquarters to sell trust products, leading to a shrinkage of bank sales channels, especially for large banks.

2. Non-bank financial institution channels

In recent years, due to the sluggish stock market, the business of securities company branches has not been prosperous, while trust products have been flourishing, with high and stable yields and rigid repayment, attracting many investors and funds. In light of this, securities companies, rather than being passive, have actively responded by transforming into wealth management consultants and acting as agents for selling trust products. However, after the introduction of asset management products last year, securities companies prioritized selling their own asset management products, which has also had a significant impact on this channel.

3. Non-financial institutions

This is the gray channel. Many investment consulting companies and other general business enterprises are currently also acting as agents for selling trust products, and they account for a significant proportion, forming a scale that regulatory departments have also tacitly accepted.

From a risk perspective, financial institutions selling trust products are generally more cautious because they need to maintain long-term relationships with their own clients and are subject to regulation, so they conduct a certain level of internal review of products. In contrast, many non-financial third parties prioritize profit and pay little attention to risk. To enhance their competitive edge in selling, these third parties often cut a portion of the commissions they receive from trust companies and directly give cash to investors after signing contracts and transferring funds. This practice, in turn, creates vicious competition for trust companies, which need to avoid this issue in setting product yield rates.

The last two questions posed by the questioner are not really questions. Different products have different risks, and naturally, yields will also differ. Rigid repayment itself carries risks, and the risks of rigid repayment vary from company to company, so prices will naturally differ.

Website sales require bringing in clients and phone inquiries as a top priority; setting a deadline would be counterproductive.

Trust vs. Funds

What are the differences between trusts and funds?

Scott Yang

What level of answer are you looking for? I will try to explain it in simple terms.

From the essence of these two concepts, trusts and funds are independent but overlapping concepts.

A trust is a legal arrangement in which you (the trustor) transfer ownership of property to another person (the trustee), who operates that property and distributes the operational income to the person you designate (the beneficiary). How the trustee operates depends on the laws governing the trust and the agreements in the trust legal documents.

A fund, on the other hand, is an investment arrangement, meaning a group of people (which can be a few individuals or an unspecified public) pool their money together in a certain form to invest and enjoy the returns. The "certain form" can take various forms, such as a company, a partnership, or even a trust.

From the above analysis, it is clear that the intersection of trusts and funds is that investors (the trustors of the trust) pool their money together and entrust it to a trust company (the trustee of the trust) for investment operations, with investment returns distributed back to the investors (the beneficiaries of the trust) based on their proportion. This type of investment-oriented trust arrangement is usually referred to as a "unit trust."

Beyond this intersection, trusts (traditionally, in foreign contexts) can also serve other purposes beyond investment, such as family wealth inheritance, providing living funds for descendants (one famous example is that Hitler's living expenses during his studies in Austria were funded by a trust set up by a family elder), and in some cases, tax avoidance.

Funds, apart from the trust model, also commonly include corporate forms (where all money is invested in an xxx investment company, and investors are shareholders of that xxx investment company, enjoying investment returns based on their shareholding levels) and partnership forms (which are more commonly used in private equity funds and hedge funds).

Specifically returning to China, the current trust legislation is relatively rudimentary and mainly focuses on unit trusts. In the past few years, during the market boom, domestic trust companies primarily focused on this area. For the purpose of investor protection, China's trust legislation has set a high threshold for unit trust investors.

As for funds, the current legal situation in China allows private equity funds to adopt corporate forms (but this is subject to updates in corporate legislation) and partnership forms; public funds are currently mostly trust-type/contract-type, but there have been calls to introduce corporate-type and other organizational forms.

From what I understand, although domestic trust companies also have family trust (referring to the other trusts mentioned in point 3) businesses, the business threshold is very high, and the actual business volume is also very small.

2013-07-24

Are domestic bonds worth buying?

Are domestic bonds a good financial tool? Should one buy some domestic bonds?

Xu Yinpeng

In fact, the money market funds we are familiar with primarily invest in bonds; buying money market funds essentially means buying a basket of short-term bonds, which are selected by fund managers. Bonds, in simple terms, are IOUs, a commitment to pay interest at a certain rate and repay the principal under agreed conditions. In fact, bank deposits are essentially a type of bond: banks promise to pay you interest at a certain rate and ultimately return the principal.

The bonds we are most familiar with are government bonds. Currently, the yield on a 5-year savings-type government bond is 5.41%, which means that if you buy a bond for 100 yuan, you will receive 5.41 yuan in interest income at the end of each year for the next five years, and in the fifth year, you will also get back your principal (and the last interest payment). In addition to government bonds, enterprises also issue bonds to raise funds. In the current domestic context, the conditions for issuing government bonds are quite stringent, so there have been no defaults in the domestic bond market for over 20 years, meaning all bonds have ultimately fulfilled their obligations to repay principal and interest, although there have been cases of delayed payments.

Bonds issued by enterprises often have yields higher than government bonds. For example, the 11 Suzhong Energy bond, which recently dropped to 91.4 yuan, now has a pre-tax yield to maturity exceeding 10%, with a coupon rate of 7.05%.

These two yield rates may confuse people, so let me explain: Currently, the 11 Suzhong Energy bond has three years until maturity. If you buy it now for 91 yuan and hold it until maturity, your annualized yield over these three years will be 10%. This 10% yield comes from (ignoring tax burdens): buying the bond at 91 yuan, the issuer will repay you at the face value of 100 yuan at maturity, and during these three years, you will also receive 7.05 yuan each year.

The 7.05% is crucial for the issuer because regardless of how the bond is traded in the market, or how its price fluctuates, on each interest payment day, whoever holds the bond will receive interest based on the face value of 100 yuan at 7.05%. Therefore, the yield to maturity is the annual yield you would receive if you held the bond until maturity, while the coupon interest is the interest payment you receive from the issuer. Clearly, if you do not hold the bond until maturity, such as holding it for only one year, your yield is uncertain: various scenarios could occur, and you might even incur a loss. For instance, if you hold it for 255 days, your annual return will depend on two factors:

1. Coupon interest. This is already set at an annualized rate of 7.05%. If you hold it for 255 days, your interest income will be 100 × 7.05% × 255/365 = 4.93 yuan.

2. Changes in bond prices. If the price rises from 91.4 yuan to 92.4 yuan, your total return will be 5.93 yuan, with an annualized yield of 8.49%; if the bond price drops from 91.4 yuan to 85 yuan, your total return will be -1.47 yuan, with an annualized yield of -2.3%.

People might think that bonds are not that appealing, as there is default risk on one side and the yield is not particularly high on the other. First, an annualized yield of 6% to 10% is considered a good return. Secondly, the risk of obtaining this yield from bonds is genuinely low, especially in the current context where overall default risks are very low, with only localized default risks. If you choose bonds with high credit ratings and create a diversified portfolio, the risks you bear are actually very low. For those who find bonds that match their investment horizons, the price fluctuation risks can almost be ignored.

Returning to the earlier example, if I say that the possibility of default on the 11 Suzhong Energy bond is extremely low, then the chance of its price falling to 85 yuan a year later is also very slim. This is because if it does drop to 85 yuan, investors could buy a two-year bond at that price with a coupon interest of 7.05%, yielding an annualized return of 16%. Clearly, the market is unlikely to provide such a significant benefit to everyone. Therefore, bond prices cannot fall indefinitely unless there are severe concerns about default risks. Bonds are low-risk and have low thresholds; you can buy a bond for as little as 1,000 yuan, with T+0 trading. You only need to open a stock account to buy and sell bonds.

Supplement:

I would like to commend @Yin Xiaoer for their perspective and then share my thoughts. The liquidity issue is a hard flaw of exchanges, but the reality is that some bonds do provide a certain level of liquidity and are not all "zombie bonds." If the average daily trading volume exceeds 3 million and the lower trading volume is above 500,000, liquidity is not an issue for small retail investors buying just a few thousand. Since Zhihu's audience is primarily small investors, I believe there is still operational feasibility. Furthermore, bond trading is indeed not suitable for novices, so I think a buy-and-hold strategy is a good approach for beginners. For a buy-and-hold strategy, the 11 Chaori bond you mentioned is an exception; I suggest that if novices do not have professional investors to help them choose, they should opt for bonds with higher ratings and avoid those with particularly high yields. Additionally, it is crucial to create a diversified portfolio: with 10,000 yuan, you can create a portfolio of 10 bonds, which is very helpful in reducing risk. If you have a good understanding of a particular industry, conducting fundamental analysis before buying is even better. For example, if you are familiar with the real estate industry, you can pay attention to the 09 Mingliu bond. As for the 11 Suzhong Energy bond, I believe the default risk exists but is very small.

As for bond funds, I wholeheartedly agree. Historically, pure bond funds with excellent performance are a great choice for novices, as they save the hassle of managing a bond portfolio and indirectly avoid interest taxes. Of course, when buying bond funds, it is essential to choose the right timing; buying medium to long-term bonds before the start of an interest rate hike cycle is not advisable.

As for convertible bonds, I am quite passionate about them, but novices may fear the risks. Therefore, I will not elaborate on ordinary bonds here, but for investors seeking relatively high returns, some convertible bonds with guaranteed minimum returns can indeed be considered, such as Minsheng Convertible Bonds (below 106 as of October 23).

2013-10-24

Yin Xiaoer

Countless friends have asked me this question, and in contrast to @Xu Yinpeng's viewpoint, I have repeatedly advised individual investors not to easily participate in the bond market.

First, for the foreseeable future, individual investors can only participate in the exchange bond market, which means buying and selling bonds like stocks. However, investors often find that many bonds have neither buy nor sell orders, and the K-line charts are completely ineffective. In reality, mainstream bond investors are concentrated in the interbank bond market, which individuals cannot access. Therefore, during a major bear market for credit bonds, such as in 2011, exchange bonds may become worthless and unsellable. At that time, if someone needs to pay tuition, they might not even be able to sell a bond at an 80% discount.

Secondly, bond trading requires individuals to have a deep understanding of macroeconomic fundamentals, something that most stock fund managers struggle with, let alone individual investors. First, ask yourself: what do you expect the CPI and PPI to be next month? If your error does not exceed 0.5% for more than ten consecutive times, congratulations, you might be the Zhang Wuji among individual investors. I am not saying this lightly.

Thirdly, even if you adopt the buy-and-hold strategy mentioned by @Xu Yinpeng, it essentially relies on your judgment of the company's fundamentals. The problem is that individual investors' judgments are often unreliable. For example, many older investors bought the 11 Chaori bond between 60 and 70 yuan, which corresponded to an exercise yield of around 50% to 35%, with less than two years remaining until maturity. However, the bond has now been delisted. Unfortunately, in the next two years, investors will not be able to liquidate... When the bond reaches the exercise date, even if exercised, looking at the financial statements, there is no cash available. What will be used to repay the debt? In reality, the worst-case scenario for this type of investment is total loss. The risk of this investment is similar to buying *ST stocks, but after restructuring, stocks may double or triple, while your maximum return is only 50%, and the worst-case scenario is the same. If you genuinely want to take risks, I personally recommend trading *ST stocks. Of course, I agree with @Xu Yinpeng's point that the 11 Suzhong Energy bond has no default risk. However, this is a professional judgment I make as an investment manager in an institutional setting. Bonds differ from stocks; stocks are influenced by news and concepts, while bonds require investors to accurately judge whether a company can produce real cash to repay. Most individual investors may not even know how to read a balance sheet and cannot be held accountable for their fundamental judgments. Encouraging them to gamble on junk bonds is irresponsible.

Fourth, while some may think that stock funds are problematic, bond funds are genuinely a good choice (fund investors, please do not attack me; I am not a fund manager). Individual investors do not need to manage a bond portfolio themselves. All the disadvantages faced by individual investors can be overcome by a seasoned bond fund manager and a team of experienced traders. Moreover, the most important point is that, apart from junk bonds, the differences between individual bonds are not very significant, so alpha strategies in the bond market are far less valuable than in the stock market. A mediocre bond fund manager's return may not differ much from that of the best bond fund manager, while the difference in stocks can be vast. Additionally, bonds have low volatility, making the probability of losing money when buying bond funds extremely low. For example, even after the unprecedented money shortage in June, the year-to-date returns of all medium to long-term pure bond funds have generally not been negative—please actively ignore the last place "Huaxia Asia Bond China," which invests in Hong Kong bonds and has a peculiar market with a high proportion of junk bonds, fluctuating daily like stocks.

Fifth, individuals can trade convertible bonds. To put it bluntly (please do not hit me, my mentor who introduced me), this is like trading stocks; listen to news, trade concepts, sell when the price rises, and there is a bond floor when it drops. You can basically watch the K-line and trade it repeatedly. With this cycle, skilled technical traders may earn money.

To summarize my advice: individuals should allocate fixed-income investments, but I recommend doing so through money market funds, bank wealth management products, and bond funds; I oppose individuals directly buying bonds, with the only exception being convertible bonds.

Understanding Bonds

What are the differences between spot yield, yield to maturity, and forward yield?

Li Hao

Thank you for the invitation.

I think this question can be transformed into: what are these three things?

Because if you know what these three are, the differences are self-evident. So let me explain what each of them is.

Spot yield (spot rate) is the yield we most commonly understand. For example, if the one-year spot yield is 2.83%, then if you lend 100 today, you will receive 102.83 next year. For example, if the five-year spot yield is 3.24%, then in five years, you will receive the principal of 100 plus the interest of 100 × (1 + 3.24%) × 5 (China uses simple interest calculation, thanks to @Fang Shiwushi for the reminder). In another way, when you go to the bank to deposit money (fixed deposit), the interest rate displayed on the electronic version is the spot yield, which should be easy to understand. This type of government bond is also called a zero-coupon bond, meaning no interest is paid during the term, and the final payment is made at maturity.

Yield to maturity (YTM) is generally not used by the average person but is very important in finance.

Most government bonds are coupon bonds, for example, if the coupon interest (coupon) is 5%, paid annually, it means that if you buy a bond for 100 yuan, you will receive 5 yuan in interest each year. However, this is completely different from the spot yield mentioned above. This 5% cannot be equated to a 5% yield because bonds are not necessarily issued at face value; they may be issued at a discount or premium. For example, if a bond has a coupon of 10%, it is clearly higher than what is commonly understood as "interest rate," and in this case, it must be issued at a premium, and the actual yield will definitely be less than 10%.

If you do not want to delve too deeply into this, you can understand yield to maturity as "what the real yield is in this case."

If you are a serious person, I will explain it seriously: if you discount future cash flows at a fixed interest rate to present value, which is to find PV, then YTM is the rate that makes the calculated PV equal to the current price of the bond. YTM can be applied in various fields, not just bonds. For example, if you have a 10-year government bond that pays interest once a year, you will discount the future 10 interest payments and the principal at maturity back to present value, which equals the current price of the bond.

YTM is quite useful because, for example, if a 10-year bond has a 5% yield and is currently priced at 101 yuan, while a 5-year bond has a 3% yield and is priced at 98 yuan, the time and coupon rates are different, and the prices are different. How do you determine which bond is "more valuable"? If you compare prices, you are mistaken because the more expensive bond pays 5% interest; if you think 5% is greater than 3%, you are also wrong because the 5% bond is expensive and has a longer duration. At this point, an important evaluation indicator is YTM; for example, if the 10-year YTM is 3.5% and the 5-year YTM is 3.6%, then it can be said that the 5-year bond is "more valuable," although this is not very common in reality.

Now, moving on to forward yield, this is calculated using spot yields. Its main function is to provide a predictive view of future interest rates. Here, we need to shift our thinking about the forward yield curve; for example, the 10-year forward yield does not refer to the current yield but rather the yield of a one-year (or two-year, three-year, etc.) zero-coupon bond ten years from now. This value is a forecast derived from today's spot yields. The forward yield curve can also be used for yield curve trading; for instance, if you see a "peak" or "trough" in this curve, traders or fund companies can devise strategies to trade and profit.

The calculation method for forward yield is not easy to understand; if it is not necessary for work, it is generally sufficient to focus on the spot yield curve and the yield to maturity curve.

I originally wrote a lot more, but I want to know if there are any unclear parts in what I have said above, so I can improve what I have already written. I will gradually add more later. This question, while short, involves very complex underlying concepts, and the more I write, the more I feel overwhelmed. If anyone has any knowledge they do not understand, please comment, and I will continue to improve and revise.

2013-10-06

Can insurance also be wealth management? Is wealth management insurance worth it? What are its pros and cons? Who is it suitable for?#

Da Long

Insurance products are a must-have in family wealth management and should be the first to be configured. As for why this is the case, it is not directly related to this question, so I will directly answer the relevant questions about wealth management insurance products.

We cannot simply say whether this product is worth it or not, as this question is relative. However, for most families, I still do not recommend wealth management insurance.

The specific reasons are as follows:

First, we need to clarify the original intention behind choosing insurance products. Personally, I believe that insurance is not bought for one's own protection but for the protection of our closest family members. The various illnesses or dangers we face will not lessen just because we buy insurance; it is only that after these accidents occur, we will not impose any financial burden on our family. What we buy with insurance is this protection, not the hope that insurance products will help us preserve and increase our existing assets.

Once we clarify our intention for choosing insurance, we may still feel conflicted. Wealth management insurance products can serve both protective and asset-preserving functions, so why not choose such products? The reason is simple: if you expect the insurance company to help you achieve wealth appreciation, you might as well choose to deposit the money in a bank fixed deposit, which would yield more than what the insurance company generates. Additionally, if wealth management insurance products are to be combined with protection, they either provide significantly less protection than pure consumption-type insurance products or require much higher premiums for the same coverage. Therefore, I personally believe that, relatively speaking, choosing wealth management insurance is not as cost-effective or wise as choosing pure consumption-type insurance.

Moreover, I have interacted with many executives from insurance companies, and they all unanimously advise choosing pure consumption-type protection insurance as a better option.

Of course, I am speaking relatively; I think for recent graduates or those who lack financial discipline, wealth management insurance products can be a short-term choice, as they can help you save money each month while providing some protection for those who are still young and unable to purchase insurance products. This can be considered a solution.

2013-10-23

Shen Xiaoshen

Thank you for the invitation.

First, I believe that the target audience for wealth management insurance needs to meet the following two conditions:

1. Have disposable income;

2. Be patient with time.

Why do I say you need disposable income? Because wealth management insurance has particularly low yields in the short term. Take the commonly used 5+5 type insurance as an example, where you save for five years and then keep it for another five years; after ten years, the yield is only around 1% (but with some protection). In my view, it is better to deposit the money in a fixed deposit and use the fixed deposit yield to buy a card.

There are also universal products available; currently, universal products have ten-year, five-year, and sixty-year terms, with yields mostly around 4%, along with protection. I think these products can be considered, but they have a longer duration, and the yields are similar to fixed deposits. Exiting midway incurs losses, so it is best to allocate some idle money.

Most wealth management insurance products are lifelong and without additional protection, especially bank insurance products, such as saving for five years for lifelong coverage, which have low yields and no additional protection. This means that if the insured dies, only the principal and earnings will be returned, with no extra compensation. Although it is said that the earnings can compound over time, the extra money you receive later is merely what you would have received less of earlier.

However, these types of insurance have several advantages:

1. The earnings are tax-exempt, meaning the product's earnings are exempt from all taxes.

2. They are protected from debt; if you have outstanding debts, the earnings and principal of the insurance product, or the insurance compensation, cannot be used to offset debts.

3. They are exempt from inheritance tax. If you are wealthy, you can allocate a lot of money to insurance, and when you die, your heirs will not have to pay inheritance tax on this wealth.

Overall, wealth management insurance is not suitable for many people; the primary importance of insurance is protection. If you ask me to save several thousand yuan a year for insurance wealth management, I would prefer to spend a few thousand yuan a year on consumption-type insurance.