Two Questions re Bond Funds

[Bustoff]

If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
If a bond's coupon rate is equal to its YTM, then the bond is selling at par.

1. Can the guidelines above apply to "bond funds" by comparing the bond fund SEC yield to its Average Coupon ?
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For 2011, the Vanguard Total Bond Market Index Fund (AdmShrs), had a Capital Return of 4.26%.

For 2012 its Capital Return was 1.42%.

2. If interest rates account for the Income Return, then what explains or accounts for the Capital Return portion of a bond fund ?

[ObliviousInvestor]

I could be missing something, but I'm not sure that it makes sense to talk about a bond fund selling at a discount or premium. At any given time, some of the bonds in the portfolio will have market values less than their face values, while other bonds will have market values greater than their face values.

If interest rates account for the Income Return, then what explains or accounts for the Capital Return portion of a bond fund?

Changes in interest rates cause the prices of the bonds to move -- thereby resulting in positive or negative capital return, depending on which way interest rates moved.

[dbr]

For 2011, the Vanguard Total Bond Market Index Fund (AdmShrs), had a Capital Return of 4.26%.

For 2012 its Capital Return was 1.42%.

2. If interest rates account for the Income Return, then what explains or accounts for the Capital Return portion of a bond fund ?

The market value of the bonds in the fund went up, more in 2011 than in 2012. This would be the market value side reflecting falling interest rates over the course of those years. Note I do not say falling interest rates caused increasing market value. The two things are simply two sides of a mathematical tautology. One must also be careful in researching this that if a fund has made a capital gains distribution, that distribution must be include in the return, but will not appear in a chart of net asset values. The NAV will fall when the distribution is made.

[Bustoff]

I could be missing something, but I'm not sure that it makes sense to talk about a bond fund selling at a discount or premium. At any given time, some of the bonds in the portfolio will have market values less than their face values, while other bonds will have market values greater than their face values.

Okay, that makes sense. But when I see that the Total Bond Fund has an average coupon of 3.7%, I don't understand why its SEC yield is only 1.61%.
Why is its SEC yield so much lower ?

[ObliviousInvestor]

When I see that the Total Bond Fund has an average coupon of 3.7%, I don't understand why its SEC yield is only 1.61%. Why is its SEC yield so much lower?

Because rates have been heading downward for the last several years, so a majority of the bonds in the portfolio have coupon rates that are higher than their current YTM. (That is, as per what you wrote above, they are selling at a premium.)