3.3 Index Construction

The main indices are weighted by market value. Alternative weighting schemes are also available on the infraMetrics platform.

The total return is calculated by adding the income or cash yield, reflecting the debt service due to paid and accrued interest, and the price return, reflecting the gains or losses due to changes in the end-of-quarter price and principal repayments.

The cash yield represents the sum of interest payments and principal repayments:

where

  is cash yield at time t

 is the interest payment at time t

 is the principal repaid at time t

 is the outstanding principal at time t-1

Price Returns are computed thus as

where is the bond price at time t and  is the price return at time t

In addition, yield-to-maturity or internal rate of return equating the security’s price to its future cash flows is estimated as a solution of:

where

 is the bond price at time t

 is the ith cash flow at time t

 is the yield to maturity at time t

 is the number of years until maturity at time t

The duration of each security is also computed as the standard Duration calculation, the time-weighted discounted value of future cash flows divided by the sum of discounted future cash flows.

where

 is the duration of the debt instrument at time t

 is the number of years from time t

 is the ith risk-free rate at time t

 is the spread

 is the number of years until maturity at time t

 is the ith cash flow at time t

 is the yield to maturity at time t