Bond Indices Key Terms

Learn bond indices terminology as tools to understand the bond market

By Felicia R. Blue

Investors use bond indices to determine how the overall bond market is doing. They also rely on them to find out how the corporate bond holdings are performing. Bonds play essential roles in both the U.S. and global markets. Governments rely on bonds to finance their projects, such as building schools, roads, or hospitals. Corporations, on the other hand, issue bonds so that they can expand their operations or buy new equipment. Here are a few terms to understand when it comes to bond indices.

Bond indices

Bond indices contain listings of bonds. Investors or bond brokers use them as ways to gauge how the bond market performs over a period of time. Bond indices also consist of convexity, yield and duration. They are broken into different categories, such as corporate bonds, mortgage-backed securities and government bonds.
Try: Morningstar has its own bond indices. These indices track both global and domestic markets.

Market capitalization

Market capitalization is a calculation of an economic or corporate size that is equal to the share price multiplied by the shares outstanding of a company. Most bond indices are heavily weighted by the market cap. As a result, less creditworthy issuers that have large amounts of debt make up a greater part of the index than creditworthy issuers.
Try: Financial Terms has information on market capitalization.

Bond yield

Bond yield is the return the bondholder will receive on a bond. The bond yield is equal to the coupon price divided by the price. One thing to keep in mind is that bond prices change daily. As the price changes, so does the yield.
Try: Investopedia provides comprehensive information on how to calculate bond yields.

J.P. Morgan Global Aggregate Bond Index

J.P. Morgan Global Aggregate Bond Index consists of bonds from developed and emerging countries. This bond index started in November 2008. J.P. Morgan Global Aggregate Bond Index tracks both investment-grade and multi-currency instruments. It represents nine asset classes, including Emerging Markets External Debt, Emerging Market Local Treasuries, U.S. Credit and Euro Credit.
Try: To learn more about the J.P. Morgan Global Aggregate Bond Index, click on J.P. Morgan.

Dow Jones Corporate Bond Index

The Dow Jones Corporate Bond Index consists of an equally weighted collection of more than 90 newly issued investment-grade corporate bonds, along with securities that will mature at different times. The balance of this bond index changes every month.
Try: Understand more about the Dow Jones Corporate Bond Index at Dow Jones.

High-yield bonds, junk bonds

High-yield bonds are rated lower than the investment grade. Other names for high-yield bonds are junk bonds, non-investment grade bonds or speculative grade bonds. Although they have higher risks of defaulting, high-yield bonds usually pay higher returns. This is why these securities attract investors.
Try: State Street Global Advisors offers a high-yield bond index. This index follows the High Yield $200 Million Very Liquid Index (HYVLI).