Features

A bond mutual fund owns a portfolio of bonds selected to meet the fund’s investment goals. Some of the standard features of bonds are that they pay a fixed amount of interest every six months and have a set maturity date when the bond face amount will be returned to the bond holder. After they are issued, bonds trade on the secondary market, where their prices fluctuate based on current interest rates and the credit quality of the issuer.

Yields

Bond funds pay out the interest earned from the bonds in the portfolio as dividends. Most bond funds pay a monthly dividend. Bond fund yields are reported two ways. The SEC 30-day yield is computed using the method directed by the SEC. This yield is comparable to the yield-to-maturity of an individual bond. The SEC yield is what an investor could expect to earn over several years if the bonds in the portfolio did not change. The distribution yield is the current rate of the dividend payouts. This is the interest the portfolio earns each month that is paid out to the shareholders.

Considerations

To achieve higher yields, a bond fund must either own longer-term bonds or bonds with a lower credit quality. In a period of falling interest rates and a strong economy, these funds will pay high yields and have rising share prices. If rates are increasing, a fund with shorter bond maturities will have a more stable share price and be able to increase the distributions quicker as rates rise.

Potential

References

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