Exploring Types of Fixed Income Indexes | CFA Level I Equity Investments

In this lesson, we’re diving into the different types of fixed income indexes.

Compared to equities, the fixed income universe is much broader. Fixed-income securities vary widely in these dimensions:

• Geographical location of the issuer
• Type of issuer (government, government agency, corporate, structured finance entity)
• Business sector for corporate issuers (energy, finance, healthcare, technology)
• Credit quality (investment grade or non-investment grade)
• Time to maturity (from a few days to 30 years or beyond)
• Coupon structure and rates (zero-coupon, fixed coupon, floating rate notes)
• Embedded options (convertibility, callable, putable bonds)

1. Aggregate or Broad Market Indexes

Aggregate or broad market indexes represent a geographic region’s broad fixed income securities market. For example, the Bloomberg Barclays US Aggregate Bond Index is a single-country aggregate index with over 9,200 US-based securities, including US Treasury, government-related, corporate bonds, and various types of asset-backed securities.

2. Narrower Focus Fixed Income Indexes

Most fixed income indexes have a narrower focus, subdividing fixed income securities based on:

• Market sector (government, government agency, corporate, securitized bonds)
• Style (distinguished by credit quality and/or maturity)
• Other characteristics (coupon structure, embedded options)

However, constructing fixed-income indexes presents unique challenges:

1. Selecting securities that meaningfully represent a wide market can be difficult due to the large universe of fixed income securities.
2. High turnover in fixed-income indexes results from bonds maturing and needing replacement.
3. Estimating the value of some securities may be necessary due to a lack of recent trades and fixed-income securities’ illiquidity.
4. Replicating a fixed-income index is challenging for portfolio managers because of illiquidity and high transactions costs, as well as the high turnover of constituent securities.

That’s a wrap on types of fixed income indexes! Some terms here might be unfamiliar, but don’t worry – they’re explained in detail in the fixed income course. You may want to revisit this lesson after mastering fixed income.