Question: Few of things can you tell, which are considered while creating bond indexes?
Answer: Several characteristics are critical in judging or composing bond indexes. - Sample of securities/bonds or issues - Maturity of the issue - Size of the issue - Weighting of returns for individual issues. o Returns market-value weighted o Or equally weighted - Quality of Price Data: Portfolio managers who uses the indexes need to consider the quality of the price data used in the computation is this estimated prices or actual transaction prices. - Prices are based on matrix pricing, like it involves computer model which estimates a price using current and historical relationships. - Reinvestment assumption does the rate of return calculation using the interim cash-flows.
Question: Do you know which firms publishes Bond Indexes for U.S. Investment-Grade Bond?
Answer: Four firms publish rate-of-return for investment-grade bond market indexes. - Barclays Capital which has acquired Lehman Brothers. - Bank of America-Merrill Lynch - Morgan Stanley Smith Barney. - Ryan Labs.
Question: What is the concern with the bond indexes composed based on weighting?
Answer: If bond indexes are composed using the market-value weighting is that - Consider economic conditions and reflects it in the index. - No preference: no preferences regarding asset allocation. But the concern is that in real world it is difficult to keep track of the outstanding bonds, because of various options like below - Call and Put provision - Sinking funds provision - Bond Redemptions.
Question: What are the advantages of the bond with equal weighting for an investor?
Answer: - For investor or portfolio managers who has no prior assumptions of individual issues it is good. - Consistent: Equal weighting is consistent if investor is assuming random selection of issues. – - Easier to compute: An equally weighted index is easier to compute.