Guide to the Dow Jones Corporate Bond Index

Transcription

1 Guide to the Dow Jones Corporate Bond Index

2 Contents 01. Introduction Key Features Base Date and Base Value Calculation Methodology Dissemination Weighting Index Construction Defining the Index Universe Periodic Review Index Composition Selection Process Implementation Bonds in Financial Distress...5 Appendix A...5 Total Rate of Return Calculation Methodology

3 01. Introduction The Dow Jones Corporate Bond Index reflects the market performance, on a total-return basis, of investment-grade bonds issued by companies in the U.S. corporate bond market. The index was designed to minimize the pricing and liquidity problems associated with most corporate bond indexes. Included in the family are a 96-bond composite index and a series of corporate-bond yield-curve bracket indexes at maturities of two, five, ten and thirty years indexes. The Dow Jones Corporate Bond Index is further subdivided into Financials, Industrials and Utilities sector indexes, each of which also has a yield-curve index series. 02. Key Features 2.1 Base Date and Base Value The base date for the Dow Jones Corporate Bond Index is December 31, 1996; the corresponding base value is 100. Historical total-return index values have been calculated back to the base date. 2.2 Calculation Index Formula Total returns are calculated daily for the Dow Jones Corporate Bond Index. The index is calculated using a month-to-date method where the starting value of the index is equal to 100 on its inception date. For example, if the index had a -0.12% return on its first day after the base date, the index value for the first day would be 100*( ) = A detailed explanation of the total return calculation is provided in Appendix A Input Data Daily bond bid prices are provided by Interactive Data Corporation. These daily prices are provided at 4:00 p.m. Eastern Standard Time. To avoid problems associated with market-weighted bond indexes, the Dow Jones Corporate Bond Index and its subindexes are equalweighted. The daily total return of each index is the average of the daily returns of all component bonds Weekends and Holidays Dow Jones Indexes calculates the Dow Jones Corporate Bond Index following the standard U.S. business calendar. On weekends and holidays, the previous day s closing price for each affected bond is used for index calculation. 2.3 Methodology Maturity Cells The family includes indexes at the composite level and for four maturity cells: 2 year = years 5 year = years 10 year = years 30 year = years Sectors The selection universe for the index consists of all U.S.-issued corporate bonds rated investment grade by Moody s Investors Service and/or Standard & Poor s. Bonds that qualify for inclusion in the universe are then classified into one of three sectors: Financials Industrials Utilities The Financials sector includes banks, insurance companies and financial service companies. The Utilities sector includes gas companies, electric companies and water companies. The Industrials sector includes companies in all other industries. The combination of maturity cells and industry sectors provides three industry sector yield curve index families and a composite index yield curve, created from the 20 separately calculated indexes underlying the Dow Jones Corporate Bond Index family, as shown in the following table: Composite Financials Industrials Utilities 2 year 2 year 2 year 2 year 5 year 5 year 5 year 5 year 10 year 10 year 10 year 10 year 30 year 30 year 30 year 30 year Total Total Total Total Constraints Bonds must be issued in the United States and denominated in USD. Bonds must have a minimum outstanding value of $500 million to be eligible. 3.

4 An issuer may have up to four bonds in the index, but no more than one in each maturity cell. In order to enter a maturity cell, a bond s remaining time to maturity must be at least three months longer than the minimum maturity horizon for that cell. A bond already in a cell may remain until the end of the month prior to the month its maturity would fall below the index s minimum. Only option-free (bullet bonds) are eligible. Structured notes, bonds with embedded puts, and bonds with call provisions and sinking funds are excluded from the index. Make-whole bonds are included because they do not have scheduled call dates and the redemption feature is not interest-rate driven. A bond must retain its investment-grade rating to remain in the index. Bonds must have a fixed coupon to be eligible. Must be SEC registered. 144A, Regulation S and convertible bonds are excluded. Bonds are selected at month-end. 2.4 Dissemination The Dow Jones Corporate Bond Index index return and statistics are available at approximately 7:00 p.m. Eastern Time. 2.5 Weighting Issues in the Dow Jones Corporate Bond Index are equally weighted within the maturity cells, the industry sectors and the composite index. The composite index contains 96 bonds at all times, with 36 bonds in Financials, 48 bonds in Industrials and 12 bonds in Utilities. 03. Index Construction 3.1 Defining the Index Universe All corporate bonds that meet the constraints are included in the selection universe for the Dow Jones Corporate Bond Index. 04. Periodic Review 4.1 Index Composition The goal of the Dow Jones Corporate Bond Index is to include the most liquid bonds per maturity for each sector. All issues in the Dow Jones Corporate Bond Index remain in the index until the month-end review, regardless of market condition changes. Factors considered in the review process include: New issues Credit rating changes Maturity of the issues Changes in outstanding amounts 4.2 Selection Process The component review process takes place no later than five business days prior to month-end. The final selection list will be distributed on the last business day of the month. The review process starts with a review of the current component basket, removing any bonds that fail to meet the above-mentioned constraints. Research on new on-the-run bonds is conducted to identify those issues that meet all constraints. Of these bonds, any issue that has an outstanding value greater than or equal to the outstanding value of the smallest current index component in the corresponding maturity bracket of its sector qualifies for the index. Within each maturity bracket of each sector, eligible bonds are ranked by the average of their 1-month and 3-month volumes. Bonds with the highest average volumes are added until the specified component count is satisfied. For scenarios where no on-the-run bonds are eligible for selection and additional components are needed, all qualified outstanding bonds are considered for selection. These bonds are subject to the same requirement for 1-month and 3-month average volume. Newly selected on-the-run bonds are retained in the index for a minimum of three months. 4.3 Implementation Because the daily total return of the Dow Jones Corporate Bond Index is an equally weighted average of the daily total returns of all bonds in the index, replacing a bond does not require a divisor adjustment. If a bond is to be replaced at month-end by another 4.

5 bond, the old bond s total return is used to determine the total return of the index on the last day of the month. The new bond replaces the old bond after the month-end total return figures are disseminated. The new bond is used to construct the month-end yield curve for the Dow Jones Corporate Bond Index. On the first day of the new month, that day s total return from the new bond is used to calculate the daily total returns for the Dow Jones Corporate Bond Index. 4.4 Bonds in Financial Distress Dow Jones Indexes reserves the right to remove any issue from the index at any time in response to any news that would adversely affect the solvency and liquidity of that issue. If such an event (including but not limited to a bankruptcy filing or a cut in a bond s rating that drops it below investment grade) occurs, the securities that are removed will not be replaced in the index until the next month-end index rebalancing. Appendix A: Total Rate-of-Return Calculation Methodology Total return is calculated as the sum of price return and interest return: Price Return Calculation Beginning-of- Period Market Value End-of-Period Market Value Total Return (%) (Beginning Bid Price + Beginning Accrued Interest) * Beginning Par Amount Outstanding (Ending Bid Price + Ending Accrued Interest) * Beginning Par Amount Outstanding + Coupon Payment (End-of-Period Market Value / Beginningof-Period Market Value 1) x 100 Par amount outstanding is assumed to be constant intra-month. Any change of par amount is reflected at the beginning of the new month. 5.

6 Except where noted, all information as of January 2013 GENERAL DISCLAIMER Copyright 2013 by S&P Dow Jones Indices LLC, a subsidiary of The McGraw-Hill Companies, Inc., and/or its affiliates. All rights reserved. Standard & Poor s, and S&P are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ), a subsidiary of The McGraw-Hill Companies, Inc. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ). Trademarks have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively S&P Dow Jones Indices ) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. S&P Dow Jones Indices makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor, and S&P Dow Jones Indices makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. No content contained in these materials (including index data, ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse-engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P Dow Jones Indices. The Content shall not be used for any unlawful or unauthorized purposes. S&P Dow Jones Indices and its third-party data providers and licensors (collectively S&P Dow Jones Indices Parties ) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Dow Jones Indices Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN AS IS BASIS. S&P DOW JONES INDICES PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Dow Jones Indices Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. S&P Dow Jones Indices keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P Dow Jones Indices may have information that is not available to other business units. S&P Dow Jones Indices has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. In addition, S&P Dow Jones Indices provides a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address. RULE-GEN