Equity and Fixed Income Products
This domain tests the instruments themselves: what a share or bond actually entitles you to, how values are computed, and what happens on the ex-rights date or at bond conversion. Numeric items cluster around ex-rights pricing, convertible-bond conversion value, and duration-based price sensitivity.
Equity essentials
- Ordinary shares carry voting and residual claims; preferred shares rank ahead on dividends and liquidation but usually lack votes. A-shares, H-shares and red chips differ by listing venue and currency, not by underlying business.
- Valuation tools: P/E, P/B, dividend yield, EV/EBITDA. Each fails somewhere - P/E on loss-makers, P/B on asset-light firms.
- Corporate actions: cash dividend (派), bonus shares from retained earnings (送股), capitalization of reserves (转增), rights issue (配股) and placement (增发).
- Ex-rights price = (previous close − cash dividend per share + subscription price × subscription ratio) ÷ (1 + bonus ratio + capitalisation ratio + subscription ratio).
Fixed income essentials
- Market segments: Treasury and local government bonds, policy-bank financial bonds, corporate bonds (CSRC regime), enterprise bonds (moved to CSRC review in the 2023 reform), and interbank instruments such as MTNs and commercial paper. Most bond trading is in the interbank market, not on exchanges.
- Key risks: credit, interest rate, liquidity, reinvestment. Modified duration approximates the percentage price change for a 1% yield move.
- Convertible bonds blend a bond floor with an equity option: conversion value = (face value ÷ conversion price) × share price. Issuers typically hold a forced-redemption right when the stock trades at 130% of the conversion price for 15 of 30 trading days.
Worked example
A stock closes at 20.00 yuan and announces: per 10 shares, 2 bonus shares, 3 converted from reserves, and a 1.00 yuan cash dividend. What is the ex-rights reference price?
Reasoning: convert everything to a per-share basis - bonus 0.2, conversion 0.3, cash 0.1. No rights issue, so numerator = 20.00 − 0.10 = 19.90; denominator = 1 + 0.2 + 0.3 = 1.5. Ex-rights price = 19.90 ÷ 1.5 = 13.27 yuan. The holder is not poorer: they hold more shares worth less each, plus 0.10 yuan cash per original share.
Traps that cost marks
- Adding the cash dividend instead of subtracting it in the ex-rights formula.
- Forgetting that conversion value uses face value (usually 100), not the bond's market price.
- Treating duration as a full price-forecasting model while ignoring convexity for large yield moves.