Bond-Market Indexes

Bond-Market Indexes - Bond-Market Indexes • Basic Concept...

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Unformatted text preview: Bond-Market Indexes • Basic Concept – – – Relatively new and not widely published Growth in fixed-income mutual funds increase need for reliable benchmarks for evaluating performance Many managers have not matched aggregate bond market return • Increasing interest in bond index funds • Requires an index to emulate 5- 1 Bond-Market Indexes • Difficulties in Creating the Bond Index – – – – Universe of bonds is much broader than that of stocks Range of bond quality varies from U.S. Treasury securities to bonds in default Bond market changes constantly with new issues, maturities, calls, and sinking funds Bond prices are affected by duration, which is dependent on maturity, coupon, and market yield 5- 2 – Bond-Market Indexes • U.S. Investment-Grade Bond Indexes – – – Four investment firms maintain indexes for Treasury bonds and other investment grade (rated BBB or higher) bonds Relationship among these bonds is strong (correlations average 0.95) Returns for all these bonds are driven by aggregate interest rates - shifts in the government yield curve 5- 3 Bond-Market Indexes • High-Yield Bond Indexes – Non-investment-grade bonds • – – – Rated BB, B, CCC, CC, C Four investment firms and two academicians created indexes Relationship among alternative high-yield bond indexes is weaker than among investment grade indexes Merrill Lynch Convertible Securities Indexes 5- 4 Bond-Market Indexes • Global Government Bond Indexes – – Global bond market dominated by government issues Several indexes created by major investment firms • • Use market-value weighting • Use trader pricing • – Measure total rates of return But sample sizes and numbers of countries differ Differences affect long-term risk-return 5- 5 performance ...
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Bond-Market Indexes - Bond-Market Indexes • Basic Concept...

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