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  • msf October 2015
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APY vs. Bond Yield

Is there any practical logical way to relate/convert a bond fund yield to APY?

thanks.

Comments

  • Not sure what you have in mind here, so let's try a simpler question. What would APY for an individual bond mean for you? I see various possibilities:

    A bond typically has coupon payments twice a year, so its APY (using compounding, like a bank's APY) would be (1 + r/2) x * (1 + r/2) where r was the APR. r could be either
    coupon/face value or coupon/purchase price, depending on what you're looking for.

    Either way, that would only represent the compounding of the coupon, and not any change in bond price. For example, a zero coupon bond would have an APY of zero if APY only included coupon payments. But I doubt that's what you have in mind.

    What I personally care about (especially if I were holding until maturity or call, which is somewhat implied by computing a compound yield) is yield to worst (yield to maturity or yield to call, whichever were lower). That's a calculation (like amortization) that includes both the coupon rate and the change in price to maturity.

    If this is the figure of interest, then a zero coupon bond with a price of $50 (face value of $100) that matured in 12 years would have a yield to maturity of 6% (rule of 72).

    The best approximation of yield to worst for a portfolio of bonds (such as a mutual fund) is the SEC yield. It incorporates the price changes in the underlying bonds and their coupon rates. It's my figure of choice, because it includes all factors instead of looking only at interest payments which can be misleading.

    Here's a pretty clear article from Forbes on current yield and SEC yield.
    http://www.forbes.com/sites/rickferri/2012/07/19/the-yield-trap/
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