How To Understand Mutual Fund Bond Yields
Mutual funds are investment vehicles that allow investors to pool assets together in order to invest as one collective group. Bond mutual funds not only offer a total return if you sell them higher than the purchase price, but also offer a yield on your investment. The yield is representative of the underlying bonds the fund manager purchases to hold in the mutual fund. There is a standard formula that bond managers use to determine the yield of a bond fund called the "30-day annualized yield." Walking through the calculation helps you understand where the marketing information comes from.
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Instructions
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Write down the equation used to determine 30-day annualized yield:
Yield = 2[((a-b/cd) + 1) ^6 -1]
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Determine the values of the variables in your equation. Variable "a" equals the amount of dividends and interest paid during the 30-day period. Variable "b" equals the total expenses in the period, net of reimbursements. Variable "c" equals the average number of shares per day during the 30-day period; these must be shares entitled to receive dividends. Variable "d" equals the offering price per share on the last day of the 30-day period.
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Calculate the yield. The result is the number that is the expected annual return for the bond fund. The calculation uses a 30-day period to determine an average and then annualize it based on those numbers.
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Re-evaluate the investment regularly. As interest rates and bond markets change, the 30-day annualized yield will adjust to reflect that. Check the dates on investment literature to be sure you are looking at the current yield expectations based on current market conditions.
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Tips & Warnings
Unlike an individual bond, the yield on a bond mutual fund is not guaranteed and there is no maturity date for a bond fund. Mutual funds are not FDIC insured and therefore pose an investment risk.
References
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