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The Short Answer

What Danger Lurks Behind a Bond Fund's Yield?

What the catchy figure means and what it might hide.

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One of the first lessons of basic accounting is usually about the three financials reports that paint the picture of a company's financial health: the income statement, balance sheet, and statement of cash flows. When you put them together, you know if a company's healthy or unhealthy and in which direction it's headed.

Examined individually, however, these statements can each lead to off-track diagnoses. Unfortunately, that's exactly what bond-fund investors do when they focus on yield to the exclusion of other important statistics. A bond or bond fund's yield, prominently quoted as a percentage, tells how much income one share has thrown off in a previous time period. Investors are naturally inclined to assume that higher yields mean higher income and total return going forward, and some bond-fund managers are quick to push this stat when they know theirs is above-average. But it is dangerous if it lacks context.

We'll examine why it's a mistake to focus exclusively on yield, but first, let's look at what exactly "yield" means for bond funds.

Andrew Gunter does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.