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i never realized it but the sec rules for bond funds has them figuring their 7 day yields based on par values and yield to maturity... par is usually 1,000 dollars that the bond is redeemed at maturity....
high yield bonds are almost always bought now below par so the yield for the funds include both the dividend and the price difference between par and what will actually be paid at maturity.
bond funds never hold these bonds until maturity so the yields are overstated by quite a bit.
closest to reality would be to probley take the dividend and divide it by the share price you paid to see what your getting .
even that may not give you an exact number as lately interest on newly issued junk bonds is way less then say a year ago so it wont take very long before the higher yielding bonds are replaced with newer lower yielding...
Last edited by mathjak107; 12-02-2009 at 02:23 PM..
i never realized it but the sec rules for bond funds has them figuring their 7 day yields based on par values and yield to maturity... par is usually 1,000 dollars that the bond is redeemed at maturity....
high yield bonds are almost always bought now below par so the yield for the funds include both the dividend and the price difference between par and what will actually be paid at maturity.
bond funds never hold these bonds until maturity so the yields are overstated by quite a bit.
closest to reality would be to probley take the dividend and divide it by the share price you paid to see what your getting .
even that may not give you an exact number as lately interest on newly issued junk bonds is way less then say a year ago so it wont take very long before the higher yielding bonds are replaced with newer lower yielding...
I disagree with you. Factoring in the discount and prorating it to the yield date is appropriate in valuing a specific asset. Selling it at some future date will shorten the remaining period, and should narrow the discount (thereby increasing the yield).
And the process should be reversed if currently priced at a premium.
yes you are correct but its how they reflect that fact..... what you say is true and would be reflected in the funds total return not in an interest rate payout. if you take the actual dividend and divide it by the share price your going to come up short of what is stated under the sec regulations. hypothetically if you had 1,000 bucks in a high yield bond fund and it said 10% yield you would think you would get 100 bucks a year interest at least until new bonds they bought changed that rate. . what you actually get is 95 bucks interest and a 50 buck share appreciation.
if your not aware of this is how it works you wonder why at the end of the year you didnt get a full 100 bucks interest and why not.
if you counted on that full 100 bucks to live on your going to have to sell some of those appreciated shares to make up the difference in income.
the sec regulation is yield to maturity over the last 30 days ,some funds are allowed to use last 7 days too.... it includes both the fact that the fund paid 950 and will get a 1,000 back at maturity whether they hold it that long or not so you have a 50 dollar gain plus all the interest and then that is computed as sec yield... since the figure they give you for yield includes the interest and that 50 buck gain is reflected in share price appreciation the yield number is inflated as your dividend dosnt include that 50 buck gain.
when the funds sell the bonds early they can get more or less than par. generally high yield bonds are sold below par ,however as you said that discount shrinks as it gets closer to maturity.
that is shown as a share price appreciation in a bond fund, not as an interest pay out . the total return is excactly whats stated but the interest you are paid is less then you thought you would get.
bottom line is the sec rating of yield is actually a total return rating not just an interest payout rating.
understand? its confusing for me to explain but hopefully i did it in a way that you can follow.
by the way eric kobrens fidelity insight newsletter now gives 2 ratings on all the bond funds they track.. the sec rating and the actual interest payed out in a seperate rating that dosnt include the share price appreciation, only the payout.
here is some real examples from fidelity
fidelity high income------ sec stated yield 7.51--- payout yield based on interest alone 6.43
focused high income sec 6.83 --- payout yield 6.05
strategic income sec 5.11 --- payout yield 4.59
capital and income sec 7.48 ---pay out 6.28
floating rate high income sec 4.56 --- payout yield 2.77
as you can see the difference can be slight to extremely large such as in floating rate high income fund. if those folks thought they would get 45.60 interest that year all they got in interest was actually 27.70 and they would have to sell some shares to make up the shortfall.
if those folks were scratching their heads wondering why all they got was 27.70 in interest and not 45.60 the purpose of this thread was to enlighten them as to why.
again they are not being cheated or lied to, they will get that stated advertised yield but it will have to be made up of interest and share price appreciation to actually see it.
Last edited by mathjak107; 12-05-2009 at 03:52 AM..
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