Bond funds generate income in two ways: through interest payments on the bonds, and through increases in the value of the bond over time. As market interest rates adjust and the financial health of the companies issuing the bonds changes, investors might be willing to pay more than the face value of the bond. However, the value of the bond could also go down if the issuing company becomes unstable or prevailing market interest rates increase. Figuring the total return of a bond fund requires calculating both the income return and the capital return.
Divide the interest payments received by the bond fund investment to figure the income return. This rate will never be negative. For example, if the bond fund has $100,000 of investment and generates $5,000 of interest income, divide $5,000 by $100,000 to get an income return of 0.05, or 5 percent.
Divide the ending asset value of the bond fund by the beginning asset value of the bond fund and subtract 1 from the result to figure the bond fund's capital return. This rate could be positive or negative, depending on whether the bonds held by the fund have increased or decreased in value. For example, if the bonds were worth $100,000 but are now worth $101,000, divide $101,000 by $100,000 and then subtract 1 to find the capital return is 0.01, or 1 percent.
Add the income return to the capital return to the find the bond fund's total return. In this example, add the 5 percent income return to the 1 percent capital return to find the total return equals 6 percent.
- The total return does not include the expense ratio. To figure the return after expenses, subtract the expense ratio from the total return. Continuing the example, if the bond fund has a total return of 6 percent and an expense ratio of 0.25 percent, the bond fund's return after expenses would be 5.75 percent.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."