When investing in individual bonds the most accurate representation of the income you will receive is the Yield to Maturity. A bond’s yield to maturity takes into account the bond’s coupon interest payments, the difference between the purchase price of the bond and its face value, and the return you should receive from reinvesting the coupon payments. It also assumes that you will be holding the bond to maturity. Most bond funds do not have a specific calendar date when all the bonds in the fund’s portfolio mature. They are constantly buying and selling bonds in order to maintain a specific average maturity, as required by the fund’s objective.
Because the bonds in the fund are constantly changing, the yield you can expect to receive will fluctuate as interest rates change. While there is no way to know exactly what the income stream will be, there are several types of yield calculations that are meant to give investors an idea. Here are three of the most popular: Distribution Yield The distribution yield is comparable to the current yield for an individual bond. It is the dividend income distributions made by the fund in the last 30 days divided by the Net Asset Value of the fund, which is then annualized.
The advantages of the distribution yield are that it is a relatively simple calculation which uses the most recent income distributions in its calculation. However, there are three important disadvantages of distribution yield: The Distribution yield is taking into account historical returns for the last 30 days only, which may differ significantly from future returns.
The Distribution yield does not take into account the fall in value of bonds which trade at a premium to their face value as they move towards maturity, or the rise in value of bonds which trade at a discount. …
Read more
