What Is a Yield in Bond Funds?

Bond Funds

A bond fund is an investment scheme that consists of the pooled financial resources of a variety of investors, usually with a specific investment goal. Bond funds are professionally managed by financial advisers. The bonds that make up the bond fund are debt-based securities that are used to finance corporations and mortgages, as well as, city, state and federal spending. Some bond funds only specialize in corporate or government bonds, while others may invest in a wide variety of debt-backed securities.

The yield on a bond fund is the rate of return on the portfolio, or total fund. A bond's yield is determined by several factors, including the bond's interest rate, federal interest rates, share price (NAV), the length of maturity of the bond and the quality of the bond. A bond with a high interest rate usually has a higher yield than one with a lower interest rate. Likewise, the longer the bond's maturity, the more sensitive it is to changes in federal interest rates. The quality of a bond usually corresponds to the rate of return on the bond. High yield bonds are usually riskier than those with lower yields. Bond fund share prices fluctuate daily based on the value of all the securities in the bond fund.

Bonds are classified according to the quality of the underlying securities in the bond portfolio. Those bonds that are rated medium to high quality are commonly referred to as investment grade and usually have a lower yield than other bond types. Government bonds are often classified in this category. Bonds considered below investment grade are considered high yield or junk bonds and may be invested in entities with a high risk of bond default. Short-term bonds, or those with maturities of less than five years, have lower yields than bonds with longer maturities.

Bond funds can be a reliable source of income over the long term, as bond funds typically pay dividends more frequently than individual bonds. Investors should note that while dividend payments, which include interest earned and any capital gains, or profit, earned by the fund, are paid frequently relative to other bonds, they are not paid according to a fixed schedule like individual bonds are. As with any investment, bond funds have inherent risks. Potential investors should contact a financial adviser before investing.