SEC Yield Vs. Yield to Maturity

Bond yields vary due to the data used in yield calculations.

Bond yields vary due to the data used in yield calculations.

A bond’s rate of return, or its yield, can be calculated and analyzed to determine the investment return of a bond security. Two types of yields that relate to bonds are the SEC yield, or standardized yield, and the yield to maturity. The SEC yield is used to evaluate bond mutual funds and facilitates their comparative analysis when trying to choose the best bond fund investment. The yield to maturity provides an individual bond’s rate of return if it is held until its maturity date. Both interest rates provide useful information to a bond investor.

SEC Yield Definition

The SEC yield is the effective annual percentage of interest and dividends earned by a bond fund in a 30-day period. The measure has fund expenses deducted from the calculation and the published rate typically reflects a 30-day period that lags by one month. This rate approximates the net yield to maturity of a bond fund. A bond fund’s prospectus includes a description of the yield's calculation. Fund advertisements reflect this yield as required by the Securities and Exchange Commission.

SEC Yield Calculation

For example, a bond fund might have earned $7 per share in dividends and interest in the previous month. Fund expenses accrued for the period are $2 per share. The average daily number of shares outstanding last month entitled to receive dividends is 20 shares. The maximum offering price per share on the last day of the previous month is $1. The SEC 30-day yield formula is 2 {[(a-b)/cd + 1] ^ 6 -1}. Variable “a” is the dividend and interest earned during the period, or $7. Variable “b” is the bond expenses accrued during the period, or $2. Variable “c” is the period’s average daily number of shares outstanding, or 20 shares. Variable “d” is the maximum offering price per share on the last day of the month, or $1. The SEC 30-day yield for this bond fund is .153 percent.

Yield to Maturity Definition

Yield to maturity is the rate of return earned on any long-term security, such as a bond, held by an investor until its maturity date. A relationship exists between the yield to maturity and the bond’s coupon rate, or stated interest rate. A bond selling at a discount, or below its face value, has a yield to maturity greater than its coupon rate. A bond selling at a premium, or above its face value, has a yield to maturity less than its coupon rate. If the bond trades at its face value, the yield to maturity and coupon rate are the same.

Yield to Maturity Calculation

A bond’s yield to maturity is a long and complex calculation; an investor can use a bond yield table to arrive at an approximate rate or use an online bond calculator. The calculation uses the price paid for the bond, the bond’s par value, coupon rate, and number of months to maturity. It can also take into account an investor’s federal and state tax rates to determine the before and after tax yield to maturity of a bond.

About the Author

Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.

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