Understand economics from scratch

Chapter 34 Why You Don’t Manage Your Money—Practical Finance You Must Know (6)
In the 17th century, with the support of the Parliament, the British government began to issue government bonds with national taxation as the guarantee for repayment of principal and interest.Because the bond is surrounded by a gold border, it is also called a gold-edged bond.Of course, the reason why this kind of bond is called gilt-edged bond is also because the credit of this kind of bond is very high, and ordinary people basically don't have to worry about not getting back their principal and interest.Later, gilt-edged bonds generally referred to bonds issued by the central government, namely national debt.In the United States, bonds with the highest grade of "AAA" rated by authoritative credit rating agencies such as Moody's and Standard & Poor's are also called gilt-edged bonds.

The main varieties of treasury bonds issued in the history of our country are: treasury bills and national bonds.Among them, treasury bills have been issued basically every year since 1981.Mainly for enterprises, individuals, etc. National bonds have been issued including national key construction bonds, national construction bonds, fiscal bonds, special bonds, value-preserved bonds, and infrastructure bonds. Most of these bonds are targeted at banks, non-bank financial institutions, enterprises, funds, etc. issued, and some are also issued to individual investors.The interest rate of treasury bills issued to individuals is basically set according to the bank interest rate, which is generally 1 to 2 percentage points higher than the bank deposit interest rate for the same period.When the inflation rate is high, treasury bills are also used to preserve value.

In 1997, affected by the Asian financial crisis and the oversupply of domestic products, domestic demand was insufficient and economic growth slowed down.The Chinese government issued a part of the construction bonds in due course, which strongly stimulated economic growth.When the country is facing an emergency such as war, it is also a very important means to raise war funds through the issuance of public bonds.For example, the United States issued a large number of war bonds during the Civil War, which directly promoted the prosperity of Wall Street in New York.

The issue price of a bond refers to the market price that the original investor of the bond should pay when purchasing the bond.It may or may not coincide with the face value of the bond.Theoretically, the bond issue price is the present value obtained by discounting the face value of the bond and the annual interest to be paid at the market interest rate at the time of issuance.It can be seen that the relationship between the coupon rate and the market interest rate affects the issue price of the bond.When the bond coupon rate is equal to the market interest rate, the bond issue price is equal to the face value; when the bond coupon rate is lower than the market interest rate, the company still cannot attract investors if the bond is still issued at the face value, so it is generally issued at a discount; conversely, when the bond coupon rate is higher than When the market interest rate is low, the company will increase the issuance cost if it still issues at face value, so it generally needs to be issued at a premium.

Bonds are less risky than stocks.Bonds generally agree on fixed interest, and the principal will be returned at maturity, regardless of the company's operating performance.When the company's performance is good, the return on stocks will exceed the return on bonds, but when the company's losses slump, the losses on bonds will be smaller than those on stocks.Moreover, when the company goes bankrupt, bondholders can have priority over shareholders in distributing company property, which also provides a more reliable guarantee for bonds.

Bonds are generally traded in the following ways.

1. Spot transaction
Spot trading, also called cash spot trading, is a transaction method in which both buyers and sellers of bonds are satisfied with the buying and selling prices of bonds, and the delivery is carried out immediately after the transaction is completed, or within a very short period of time.For example, investors can directly buy and sell listed bond varieties on the Shenzhen Stock Exchange through their securities accounts.

2. Repurchase transactions
The repurchase transaction means that when the bond issuer and the bond purchaser reach a transaction, they stipulate that the bond issuer must repurchase the previously sold bonds from the bond purchaser at a certain agreed time in the future at a price agreed upon by both parties. A bond that pays interest at an agreed rate (price).At present, both the Shenzhen and Shanghai Stock Exchanges have bond repurchase transactions, but only institutional legal persons are allowed to open accounts for transactions, and individual investors cannot participate.

3. Futures trading
Bond futures trading is a transaction in which the delivery and settlement will be carried out at a specific time in the future according to the price specified in the futures contract after a batch of transactions are completed by both parties.At present, both the Shenzhen and Shanghai Stock Exchanges do not open bond futures trading.

Arbitrage: Capture low-risk opportunities to make money
Arbitrage refers to the act of buying foreign exchange, commodities or securities in one market while selling them in another market at a higher price than the previous market.In layman's terms, arbitrage is to buy low and sell high at the same time to obtain the difference in the middle price.

In general, the level of interest rates in various Western countries is not the same, some countries have higher interest rates, and some countries have lower interest rates.The level of interest rates is an important factor in international capital activities. In the absence of capital controls, capital will flow across borders from countries with low interest rates to countries with high interest rates.The international flow of capital first involves international exchange, that is, the capital outflow needs to be exchanged for foreign currency, and the capital inflow needs to be exchanged for foreign currency.In this way, the exchange rate becomes an important factor affecting capital flow.

The basic incentive for arbitrage behavior is that the price difference between two markets exceeds the transaction costs of buying and selling, and the result of arbitrage activities is to keep the prices of similar commodities traded in these markets at the price determined by buying and selling. In the range.Any tendency for prices to deviate from the range established by transaction costs will induce arbitrage behavior, which will force prices back into this range.

Assume that the exchange rate of the British pound to the US dollar in London is lower than the exchange rate of the British pound to the US dollar in New York at a certain time.If the difference between the exchange rates in the two markets exceeds transaction costs, the arbitrageur uses pounds to buy dollars in the London market and then sells the dollars for pounds in the New York market.The difference between the exchange rates of the two markets minus transaction costs is the arbitrator's net income.But the arbitrage action will increase the exchange rate of sterling in the buying market, London, and lower the exchange rate of sterling in the selling market, New York, until the arbitrageur can no longer make a net gain.

Arbitrage trading has become a major means of trading in the international financial market. Most of the large funds in the world mainly use arbitrage or partial arbitrage to participate in futures or option market transactions.With the standardized development of my country's futures market and the diversification of listed varieties, the market contains a large number of arbitrage opportunities. As long as we carefully observe, concentrate on research, and capture them in time, arbitrage trading is bound to enable us to obtain stable returns.

Arbitrage can generally be divided into three categories: intertemporal arbitrage, inter-market arbitrage and inter-commodity arbitrage.

Intertemporal arbitrage is the most common type of arbitrage transaction. It is a profit made by hedging when the normal price gap of the same commodity between different delivery months changes abnormally. It can be divided into bull spread (bullspread) and bear market arbitrage ( bearspread) in two forms.For example, in the metal bull market arbitrage, the exchange buys the metal contract of the near delivery month and sells the metal contract of the forward delivery month at the same time, hoping that the price increase of the recent contract is greater than the increase of the price of the forward contract; while the bear market arbitrage is the opposite , that is, sell the near-term delivery month contract, buy the forward delivery month contract, and expect the price decline of the forward contract to be smaller than that of the near-term contract.

Intermarket arbitrage is an arbitrage transaction between different exchanges.When the same futures commodity contract is traded on two or more exchanges, due to the geographical differences between regions, there is a certain price difference relationship between each commodity contract.For example, both the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) conduct copper cathode futures trading, and the price difference between the two markets will exceed the normal range several times a year, which provides traders with cross-market arbitrage opportunity.When the LME copper price is lower than SHFE, traders can buy LME copper contracts and sell SHFE copper contracts at the same time, and then hedge and close the trading contracts and profit from them when the price relationship between the two markets returns to normal; otherwise, The same is true.When doing cross-market arbitrage, you should pay attention to several factors that affect the price difference in each market, such as freight, tariffs, exchange rates, etc.

Inter-commodity arbitrage refers to trading using the price difference between two different but related commodities.These two commodities are mutually substitutable or subject to the same supply and demand factors.The form of cross-commodity arbitrage is to simultaneously buy and sell commodity futures contracts of the same delivery month but of different types.For example, arbitrage transactions can be carried out between metals, between agricultural products, between metals and energy, etc.

The reason why traders carry out arbitrage trading is mainly because the risk of arbitrage is low. Arbitrage trading can provide some protection against losses caused by unexpected or violent price fluctuations, but the profitability of arbitrage is also higher than that of direct trading. Small.There are two main functions of arbitrage: one is to help distorted market prices return to normal levels, and the other is to enhance market liquidity.

A simple example is borrowing money at a lower interest rate while lending money at a higher interest rate, assuming there is no risk of default, this behavior is arbitrage.The most important thing here is the identity of time and the certainty that the return is positive.

In reality, arbitrage usually has a certain chronological order, and losses may occur with a very small probability, but it is still called "arbitrage", mainly in a broad sense.In layman's terms, arbitrage is the operation of buying low and selling high at the same time!
In my country's current securities market, arbitrage that is more recognized by people includes ETF arbitrage, futures arbitrage, and warrant arbitrage.

Compound Interest: The Most Amazing Wealth Appreciation Tool

There is an old story.A king who loves to play chess is superb and has never met an opponent.In order to find his opponent, he issued an imperial edict, saying that no matter who it is, as long as they beat the king in chess, the king will agree to any of his demands.

A young man came to the palace and asked to play chess with the king.After a fierce battle, the young man won the king. The king asked the young man what reward he wanted, and the young man said that he only wanted a small reward: put wheat on the chessboard they were playing on, and a piece of meat on the first square of the chessboard. grains of wheat, put twice the amount of wheat in the previous grid in the second grid, and double the amount of wheat in the next grid, so that every grid of the chessboard is always filled.

The king didn't think about it carefully, thinking that the request was very small, so he readily agreed.But soon the king discovered that even if he gave him all the grain in his treasury, it was not enough for one percent.Because on the surface, the starting point of young people's requirements is very low, starting with a grain of wheat, but after many times of doubling, it quickly becomes a huge astronomical figure.

This is the magic of compound interest.Someone once asked Einstein: "What is the most powerful force in the world?" His answer was not the power of the atomic bomb explosion, but "compound interest".

Although the starting point is very low, even insignificant, but through compound interest, people can reach unimaginable levels.But compound interest is not a numbers game, it tells us a philosophy about investing and earning.In life, the process of pursuing wealth is not a sprint or a marathon, but an endurance race over a longer time span, even decades.As long as you stick to the principle of compound interest, even if you don't start with too much capital, you can win the game beautifully because of enough patience and stable "small profits".

How to turn 10 yuan into 100 million yuan?There are two methods: the first method, as long as you put 10 yuan in the piggy bank every day and keep it for use, you can save 1 yuan in a month and 300 yuan in a year.If you keep saving, you will have saved 3600 million yuan in 277 years.The second method, if 100 yuan is used as investment at the end of each year, based on the average annual return rate of 3600% of the US S&P 30 index in the past 500 years, it only takes 12 years to become a millionaire.The famous "Rule of 31" means that the time it takes for an investment to double is exactly 72 divided by the annual rate of return.For example, an investment with an annual return rate of 72% will double the original investment after 7.2 years; if the annual return rate of this investment is 10%, then the time for the original investment to double is 12 years.Just imagine, if you have 6 yuan, invest in fixed-income products with an annual interest rate of 10% from now on, and your wealth will double in 12 years.

When we calculate the return on investment, we often like to use rolling interest to describe the high return of an investment. If we use professional financial management terms to express it, rolling interest is compound interest.Compound interest refers to adding the interest or profit earned from the investment to the principal to continue earning returns.For example, suppose an investment tool has a return of 10% per year. Calculated by simple interest, if you invest 100 million yuan, you can earn 10 yuan a year, and you can earn 10 million yuan in 100 years, which is twice as much.However, if calculated by compound interest, the annual profit is also 10%, but the actual amount earned every year will continue to increase. Taking the aforementioned 100 million yuan investment as an example, if you earn 10 yuan in the first year, the principal will become 110 million yuan In the second year, the profit is 110% of 10 million yuan, which is 11 yuan. By analogy, the third year is 12.1 yuan. In the tenth year, the total investment profit is nearly 160 million yuan, which is more than the principal. 1.6 times, this is the magic power of compound interest, which was called the eighth wonder of the world by Einstein.

Compound interest means that after a deposit or investment is returned, a new round of investment is carried out with the principal and interest. This continuous cycle is the pursuit of compound interest.The formula for compound interest future value is:
S=P(1+i)n
In the formula: P is the principal; i is the interest rate; n is the holding period.

Among them, the holding period is the key factor affecting the effect of compound interest.This "number of periods" is also called the time factor, which is a very critical factor in the whole formula. Year after year (or month after month) is multiplied, and the value becomes larger and larger.That is to say, investors adopt the method of compound interest to invest, and the final return will be the result of multiplying the return rate of each period plus the principal. The more periods, the greater the profit.

The opposite of compound interest is simple interest. Simple interest is only calculated based on the principal, and there is no process of rolling interest. However, the difference in benefits brought about by these two methods is easily overlooked by ordinary people.If you invest 1 yuan, the annual rate of return can reach 28%, and the compound interest income after 57 years will be 129 billion yuan.However, if it is simple interest, the rate of return of 28% can only bring in a mere 57 yuan in 16.96 years.This is the huge difference between compound interest and simple interest.

Therefore, we can completely apply compound interest to our investment and financial management activities.Suppose you invest 1 yuan now, and you can earn 15% per year through your operation. Then, for 20 consecutive years, the final profit with principal becomes 163665 yuan. Presumably you feel very dissatisfied after seeing this number?But for 30 consecutive years, the total amount becomes 662117 yuan. If it is for 40 consecutive years, what is the total amount?The answer may surprise you, it is 2678635 yuan, that is to say, a 25-year-old young man invests 1 yuan and earns 15% profit every year. When he is 65 years old, he can get a return of more than 200 million yuan.Of course, there are booms and recessions in the market, and it is difficult to earn 15% every year, but the rate of return mentioned here is an average. If you have enough patience and reasonable investment, this rate of return is possible. of.

It can be seen that under the compound interest model, the longer an investment lasts, the higher the return will be.The returns may not be ideal at first, but as long as you reinvest those profits, your capital will snowball and grow bigger and bigger.After years of accumulation, your funds can climb to a new level. At this time, you have made your own investment at a new level, and your annual return on funds has far exceeded the initial investment.

In addition, the huge effect of compound interest will also be reflected in the investor's operating level.Because, in order to resist market risks and realize profits in the first year, investors must study market information, accumulate relevant knowledge and experience, and master certain investment skills.In this process, some difficulties need to be overcome, but investors will also develop certain thinking and behavior habits.In the next year, investors' past knowledge, experience and habits will naturally play a role, and they will improve themselves on the original basis.Persevering in this way will make investors better at managing their own assets and making more skilled investments, which is realizing the compound interest growth of personal investment ability.The continuous growth of investment and financial management capabilities makes it possible for investors to maintain or even increase the corresponding investment rate of return.

This increase in wealth brought about by compound interest is known as the compound interest effect.Not only does the compound interest effect exist in investment and financial management, but it actually exists widely in various fields related to the economy.For example, as long as a country maintains a stable economic growth rate, it can achieve economic prosperity, thereby enhancing its overall national strength and improving people's lives.Viewed in this light, the buzzword "sustainability" is essentially another way of saying the pursuit of compound interest.

In a broad sense, there is something similar to the compound interest effect in life.For example, a person's achievements in one year may be insignificant, but if he can build on the past every year and accumulate for a long time, he will achieve great achievements.Although the value of life is difficult to calculate numerically by compound interest, as time goes by, the same starting point leads to different lives.In terms of personal achievement, there can be an unattainable distance between different people.People may have the same starting point and ideals when they are young, but their achievements in life are very different. Some achieve great achievements, while others achieve nothing and live a mediocre life.This is the embodiment of the power of compound interest in the course of life.

It can be said that compound interest is a kind of thinking, a way of thinking with patience and persistence as the core.If we can make full use of compound interest thinking, whether it is investment or life, there will be good returns.

(End of this chapter)