Bond fund yield explained

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What Is a Bond Fund Yield?

A bond fund yield is the annual income generated by a bond fund, expressed as a percentage of the fund’s net asset value (NAV). This yield represents the income paid out to investors through dividends, which primarily come from the interest earned on the bonds held within the fund. Unlike individual bond yields, bond fund yields can fluctuate over time due to changes in market conditions, interest rates, and the composition of the bond portfolio.

To calculate a bond fund’s yield, you need to know two key figures: the total dividends paid out by the fund over a certain period (usually a year) and the fund’s net asset value.

The formula for calculating bond fund yield is:

[ \text{Bond Fund Yield} = \left(\frac{\text{Total Dividends Paid Out}}{\text{Net Asset Value}}\right) \times 100 ]

For example, if a bond fund has a net asset value of $1,000 and pays out$50 in dividends over the year, the bond fund yield would be:

[ \text{Bond Fund Yield} = \left(\frac{\$50}{\$1,000}\right) \times 100 = 5\% ]

How Is a Bond Fund Yield Calculated?

To calculate a bond fund’s yield, you consider the income generated by the bonds in the fund, which includes interest payments and possibly capital gains, minus the fund’s expenses. The result gives you the income per share, which represents the yield.

Yield in Bond Funds

When you invest in a bond fund, you’re essentially purchasing a diversified portfolio of bonds with varying maturities and yields. For example, consider a bond fund that includes both government and corporate bonds. The government bonds might have an average maturity of 10 years with a 2% yield, while the corporate bonds could have an average maturity of 20 years with a 4% yield.

To assess the overall portfolio, we use two key metrics: the weighted average maturity (WAM) and the weighted average yield (WAY). In this example, the WAM of the fund would be 15 years (the average of 10 and 20 years), and the WAY would be 3% (the average of 2% and 4%). These metrics can change over time as bonds in the fund mature and new bonds are added.

1. Weighted Average Maturity (WAM): WAM is the average maturity of the bonds within the fund. It’s a useful indicator of the fund’s sensitivity to interest rate changes. Generally, bonds with longer maturities are more sensitive to interest rate fluctuations than those with shorter maturities. For example, if interest rates increase by 1%, a bond with a 30-year maturity might lose more value compared to a bond with a 10-year maturity. Therefore, if you’re concerned about rising interest rates, you might prefer a bond fund with a shorter WAM to mitigate potential losses.
2. Weighted Average Yield (WAY): WAY helps compare the income potential of different bond funds or asset classes. For instance, if you’re choosing between two similar bond funds—such as two intermediate-term government bond funds—you can compare their WAYs to identify which one offers a higher potential income. Similarly, when deciding between investing in bonds or stocks, comparing their respective yields can give you a clearer picture of which asset class might offer better income potential in the current market conditions. However, always remember that past performance does not guarantee future results.

2 responses to “Bond fund yield explained”

1. John Thomley

This is exactly backwards.
For example, if interest rates rise 1%, a bond with a 10-year maturity may lose 5% of its value while a bond with a 30-year maturity may lose only 3% of its value. As such, if you’re concerned about rising interest rates, you may want to consider shorter-term bond funds.

Duh

1. Dennis

I’ve made the article more clear, and sorry for that typo.