The Ins and Outs of Bond Yield
Step 5: Do Bond Funds Have a Yield to Maturity?
Individual bonds and bond funds are often considered interchangeable investments. But there are important differences between the two.
What Determines the Return on My Bond?
Why Are There Different Bond Yields?
How Is Yield to Maturity Calculated?
What Makes Up My Bond's Total Return?
Do Bond Funds Have a Yield to Maturity?
How Should I Interpret My Bond's Reported Return?
All bond funds quote a yield, and in fact, most bond funds are marketed to individual investors on the basis of yield. But the yield quoted for bond funds is not equivalent to the YTM quoted for individual bonds.
Unlike individual bonds, there is no date at which the entire portfolio of a bond fund matures (with the exception of so-called target funds that invest in zero-coupon bonds). Indeed, most bond funds maintain what is known as a constant maturity. That means, for example, that if a bond fund invests in long-term bonds, then bonds are bought and sold continually to maintain a portfolio average long-term maturity—of 10 years or greater.
Since the entire portfolio of a bond fund does not have a single maturity date, bond funds cannot quote a YTM equivalent to that of individual bonds.
To read more, please become an AAII member or CLICK HERE.