Distribution Yield versus SEC Yield

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Distribution Yield versus SEC Yield

Postby ResNullius » Fri Jan 08, 2010 10:03 pm

In another topic, I saw a reference to "distribution yield," and I wondered what it was and how it related to SEC yield. In Vanguard's tax exempt bond funds, the distribution yield is quite a bit higher than the SEC yield. I read the definition section, but I'm not sure I understand what this is all about. In terms of what I actually get deposited into my account, should I look to the distribution yield or the SEC yield? What's the real difference, and could someone please explain all this. Thanks.
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Postby tfb » Sat Jan 09, 2010 12:37 am

The short answer is distribution yield looks to the past while the SEC yield looks to the future.
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Postby richard » Sat Jan 09, 2010 7:42 am

The main difference is distribution yield is based on recent distributions while SEC yield is based on yield to maturity.

Yield to maturity takes into account any premium or discount on the bond. If a bond is trading at a premium, YTM takes into account the eventual decline of the bond to par. Vice versa for a bond trading at a discount. Distribution yield would not take this into account.

Each method has its defenders and detractors.

Distribution yield is typically calculated by dividing actual distributions by current price. The two major methods of computing actual distributions are (1) use the most recent month's distributions and multiply by 12 and (2) use the prior 12 months' distributions. I believe the former is more common. The later is often labeled annual distribution yield or some such.

SEC yield is essentially average YTM over a recent 30 day period. To calculate this YTM:

Divide the yield to maturity by 360 and multiply the quotient by the market value of the obligation (including actual accrued interest) to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. Assume that each month has 30 days.

Here's the complete definition of SEC yield. http://bulk.resource.org/gpo.gov/regist ... _13961.pdf
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Postby richard » Sat Jan 09, 2010 7:46 am

tfb wrote:The short answer is distribution yield looks to the past while the SEC yield looks to the future.
The future is hard to predict.

Do you mean something other than YTM, in the sense that bonds will in the future mature at par (or may be called at a call price), which means taking into account the future decrease inherent in a premium bond (price above par) and the future increase inherent in a discount bond?
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Postby ResNullius » Sat Jan 09, 2010 10:04 am

Thanks to all. I wonder why Vanguard didn't say it your way in it's pop-up box.
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Postby tfb » Sat Jan 09, 2010 12:05 pm

richard wrote:
tfb wrote:The short answer is distribution yield looks to the past while the SEC yield looks to the future.
The future is hard to predict.

Do you mean something other than YTM, in the sense that bonds will in the future mature at par (or may be called at a call price), which means taking into account the future decrease inherent in a premium bond (price above par) and the future increase inherent in a discount bond?

No. YTM assumes all future interest payments will be paid on time, and the principal will be paid while taking into consideration of the current price (premium or discount). Distribution yield as reported by M* looks to the past: what has actually been paid versus the current price.
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