Types of fixed income indices
Like equities, the fixed income securities can be classified into different groups on the basis of geography (country, global etc), type of financing (government, corporate, securitized/collateralized, government agency), maturity (short-term, medium term, long term) and credit quality (AAA, AA, A, BBB, Aaa, high yield etc.)
They can be classified on the basis of optionality (callable, putable, option-free), the currency of payments, and absence and presence of inflation.
Fixed-income indices can be categorized as follows:
• aggregate or broad market indices
• market sector indices
• style indices
• sector indices
• specialized indices (high-yield, inflation-linked, and emerging market indices)
The Barclay Capital US Aggregate Bond Index was the first fixed-income index created and it is a single-country (USA) aggregate index. It comprises more than 9,200 securities, including US Treasury, government, corporate, mortgage-backed, and asset-backed securities.
Aggregate indices can be subdivided by market sector (government, government agency, collateralized, corporate), style (maturity, credit quality); economic sector, or some other characteristics to create more narrowly defined indices.
The common distinction between the investment grade and high-yield indices is that the investment grade indices are typically further subdivided by maturity and by credit rating.
Check your concepts:
(46.11) The fixed-income indices are least likely constructed on the basis of:
(a) Presence or absence of inflation
(b) Presence or absence of coupon
(c) Presence or absence of options
(46.12) The aggregate fixed-income indices can be subdivided by:
(a) Market sector (government, government agency, collateralized, corporate)
(b) Economic sector
(c) Both market and economic sector
Solutions:
(46.11) Correct Answer is B: The fixed-income indices are constructed based on the presence or absence of inflation and options. They are not constructed based on the frequency of coupon.
(46.12) Correct Answer is C: The aggregate fixed-income indices can be subdivided by market sector, style, economic sector, or some other characteristics to create more narrowly defined indices.
