A bond market index
is a listing of bonds
or fixed income instruments and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component fixed income instruments. They differ from stock market indices
in their complexity.
Types of indices
Bond indices can be categorized based on their broad characteristics, such as whether they are government bonds
, corporate bonds
, high-yield bonds
, mortgage-backed securities
, etc. They can also be classified based on their credit rating or maturity.
Most bond indices are weighted by market capitalization. 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. This is because the average duration of the market may not be the most appropriate duration for a given portfolio. Replication can be achieved by using bond futures to match the duration of the bond index.