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  Monday November 20, 2017

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YIELD AND TOTAL RETURN IN BOND FUNDS
Learn even more about this topic with the Encyclopedia of Personal Finance™

The return on bond funds is quoted using two measurements: its yield and its total return.

Though bond funds earn interest from their investments, they do not pay interest, but dividends. You are actually owning shares of an investment company, whose business is to invest in bonds, and earnings are passed on to you in the form of dividends. If a bond fund pays an annual dividend of $0.60 per share and the current offering price is $10.00, the current yield is 6 percent.

The yield is the percent return on the amount invested.

Since a bond mutual fund does not have a fixed coupon (interest) rate, the investor must rely upon the current yield as a guide to what the fund will pay.

Total return is the yield plus or minus any changes in the fund's net asset value (or NAV?essentially what the value of one share in the fund would be if you were to redeem it.)

The total return helps you understand how the value of income from the fund's dividends may be affected by changes in the value of the fund itself.

Here's an example: If a fund's net asset value gains 4 percent during a given year and it has a 9 percent yield, then its total return is 13 percent. If a fund's total return is less than its yield, we can tell that the fund NAV must have declined. For example, if a fund with a 10 percent yield has a 3 percent total return, we know that its net asset value has dropped by 7 percentage points.

Investors who are primarily concerned with maximizing current income are most interested in a fund's yield. Those who care about maintaining the value of their principal are most concerned with the NAV. The best way to get a clear comparison between bond funds is to compare yield with yield and total return with total return.

Finally, a wrap-up of what we have learned.




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