A bond market index is a composite listing of bond

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

s or fixed income instruments and a statistic reflecting the composite value of its components. It is used as a tool in the portfolio management process to represent the aggregate characteristics of the underlying securities.

Types of indices

Bond indices can be categorized based on their broad characteristics, such as whether they are composed of government bond

Government bond

A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...

s, corporate bond

Corporate bond

A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date...

s, high-yield bonds, mortgage-backed securities

Mortgage-backed security

A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...

, syndicated or leveraged loans

Syndicated loan

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers....

, etc. They can also be classified based on their credit rating or maturity.

Bond indices tend to be total rate-of-return indices and are used mostly as such: to look at performance of a market over time. In addition to returns, bond indices generally also have yield, duration, and convexity, which is aggregated up from individual bonds.

Bond indices generally include more individual securities than stock market indices do, and are broader and more rule-based. This allows portfolio managers to predict which type of issues will be eligible for the index.

Weighting

Most bond indices are weighted by market capitalization

Market capitalization

Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...

. This results in the bums problem, in which less creditworthy issuers with a lot of outstanding debt constitute a larger part of the index than more creditworthy ones.

Indices and passive investment management

Bond indices are harder to replicate compared to stock market indices due to the large number of issues. Usually, portfolio managers define suitable benchmarks for their portfolios, and use an existing index or create blends of indices based on their investment mandates. They then purchase a subset of the issues available in their benchmark, and they use the index as a measure of the market portfolio's return to compare their own portfolio's performance against. Often the average duration

Bond duration

In finance, the duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received....

 of the market may not be the most appropriate duration for a given portfolio. Replication of an index's characteristics can be achieved by using bond futures to match the duration of the bond index.

See also

• List of bond market indices
• Stock market index
  Stock market index
  A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....
  
  
• Index (economics)
  Index (economics)
  In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from...
  
  
• Index fund
  Index fund
  An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
  
  
• Index investing
• iBoxx
  IBoxx
  The iBoxx bond market indices are benchmarks for professional use and comprise liquid investment grade bond issues. They enable investors to analyse and select benchmarks that reflect their investment profile. They are used for fixed income research, asset allocation and performance evaluation...
  
   (bond indices)

• Passive management
  Passive management
  Passive management is a financial strategy in which an investor invests in accordance with a pre-determined strategy that doesn't entail any forecasting...