Page 29 - FINAL CFA SLIDES DECEMBER 2018 DAY 13

Session Unit 13:
45. Security Market Indexes

LOS 45.i: Describe types of fixed-income indexes., p.227

Fixed income securities are often constructed based on type of issuer or collateral,

coupon, maturity, default risk, or inflation protection, Examples:

• Broad market indexes,
• Sector indexes,

• Style indexes

Key issues with fixed income indexes:
tanties
• Large universe of securities –firms and governments are involved and unlike stocks,

bonds mature and must be replaced in fixed income indexes, hence turnover is high

in fixed income indexes.
• Dealer markets and infrequent trading -fixed income securities typically illiquid and

are primarily traded by dealers, so index providers must depend on dealers for

recent prices. A lack of recent trades may require index providers to estimate the
value of index securities from recent prices of securities with similar characteristics.

Illiquidity, transactions costs, and high turnover of constituent securities make it both

difficult and expensive for fixed income portfolio managers to replicate a fixed income

index.