So far we have discussed how individual bonds work together with various options and derivatives on specific bonds. The problem we have not discussed is how to measure the performance of a portfolio of bonds against the average market performance of a similar group of bonds. In order to aid us in this comparison, a number of companies calculate a variety of bond indices. If you just consider the domestic and international bond markets for straight bonds there are innumerable numbers of indices. The list below gives you a flavour of the available types of indices:
- Domestic government bond indices (government indices are calculated for nearly all the OECD countries).
- Composite government bond indices, e.g. composite indices are calculated for all the euro- zone countries.
- Indices for supranational agencies, such as the World Bank or European Investment Bank. Indices are calculated for the whole category and individual issuers, and are subdivided according to the currency of issue.
- Indices containing issues by government agencies, regional governments, municipal councils, etc.
- Asset-backed security indices. These are often called Pfandbriefe.
- Corporate indices. These are often categorized by country of issuer, currency and even industry sector. They may also be categorized by the rating of the issue.
11.1 BOND INDEX CLASSIFICATIONS
Bond indices are often classified according to:
- the currency of the issues;
- the type of issuer, e.g. government, supranational, public sector, ...