What is a Corporate Bond Index?

A corporate bond index is a measurement of returns for a collection of corporate bonds, which are debt securities or interest earning debt agreements that are issued by companies. The corporate bond index shows how various bonds provide collective returns. Financial managers use a bond index as a “benchmark” for comparing returns over a given time period, to see how their efforts stack up against averages. This information is also used by investors to buy into bond funds.

The corporate bonds that are included in a corporate bond index are usually debts with longer maturities. Corporate bonds should mature in one year or more, where shorter term debt goes under a different classification. Those who are looking at a corporate bond index will see the averaged returns of long term corporate debt securities, where bonds present attractive investment opportunities according to their interest rates and projected yields.

The role of a bond index, or other “underlying index,” is to provide a measurement for what could happen to evenly distributed bond risks. Unlike these indexes, a “bond index fund” is often actively managed by a fund manager who takes specific risks and "leverages" a fund differently. For instance, where a passive index may be “market-weighted” or otherwise passively distributed, an active index fund might shift more of the investment into specific “hot” bonds, or even leverage for a 2:1 return ratio, changing the ways that bond funds generate value.

One of the most famous corporate bond indices is actually a mix of government and corporate debt. The Lehman Brothers Government/Corporate Fund Index provides information for fund managers and others on how diverse bond risk is affecting bond products. Other corporate bond indices work similarly in informing investors about relative bond performance.

In addition to looking at a corporate bond index, those interested in investing in a corporate bond fund can look at ratings for specific corporate bonds, issued by the various ratings agencies. Also, involved parties can look at the interest rates for a bond to learn more about the risks and benefits involved. Experts point out that corporate bonds tend to carry higher interest rates relative to government bonds, since there is often a higher risk of default or nonpayment. Investors should think about the risks of default for any corporate bond issue.