LearnBonds.com To Launch A Severely Flawed Bond IndexFebruary 24th, 2012 by Marc Prosser
Learn Bonds is proud to announce the launch of the Big Bad Bond Index. There are major problems with tracking the performance of the bond market. Unlike stocks, where there are three very good but different indexes, there is no universally accepted benchmark index for following corporate bonds. This makes reporting on the market very difficult. Learn Bonds is seeking to address this problem by creating its own index. Instead of spending lots of time and energy creating a “good” index (which may not be possible), Learn Bonds is creating a “Bad” index.
Our goal with this index is to eventually evolve it into a good index, one that provides an accurate representation of the market’s performance. However, Learn Bonds believes that it will be more educational to start with an imperfect index. We will report on the index regularly, hopefully daily. In addition to covering the performance of the index, we will highlight the problems with index and how we will attempt to correct them. Feedback from our readers on improving the index is welcome.
Lets start with how we selected the original bonds:
1) 29 Corporations – We wanted to have familiar company names in the index. Our starting point was the Dow 30 – every name in the Dow is familiar to stock Investors. However, our index does not include every name in the Dow. Unfortunately for us, there is one company in the Dow, Exxon, that hardly has any debt. The debt it does have comes from bonds issued by companies it has acquired and will be maturing shortly. Because of this we have 29 companies in the index instead of 30.
2) Lumpy Distribution of Maturity Dates – Our original notion was to have debt of varying maturities, more or less evenly spread out over a 30 year period. Unfortunately, the debt issued by these companies is not very distributed over time. We found lots of debt issues with maturities under 10 years and over 25 years. The few issues in between tended to be small in size, so we gave up on this idea. Another idea that was trashed, was only including non-callable bonds.
3) Selecting The Biggest Issues For The Most Part – We wanted to actually have fresh market based prices to calculate our index every day. Unfortunately, many bonds don’t trade every day. In order to get bonds that had daily trading activity we selected, in most cases, the largest bond issue by that particular company.
Without further ado, lets introduce the Big Bad Bond Index. We included the symbol for the company like DIS for Disney and CSCO for Cisco. In addition, we included the CUSIP number of the bond. Every bond has a unique CUSIP number which is the primary way bonds are identified.