A Look at the Various Ways to Determine Yield : Investing: Some methods give you a more comprehensive picture than others.

What does it yield?

If you’re shopping for a bond mutual fund, that’s probably the first question that rolls off your tongue. It might even be the only question you ask.

But yield alone doesn’t tell how good or appropriate a bond fund might be. Besides, there are several ways to measure investment results.

When most people talk about yield, they’re referring to “current yield”--the annual interest income generated by an investment, divided by its purchase price. But this isn’t the best way to measure bond-fund performance.

What’s known as the “distribution rate” tells what the fund actually paid to shareholders in the form of dividends. This amount might include short-term capital gains and other income besides bond interest payments.

But this number, in turn, isn’t what shows up in fund advertisements.

Instead, you will see the “30-day SEC yield,” which the Securities and Exchange Commission adopted in 1988 as a standard so that investors could more easily make comparisons.

This figure shows the yield received over the last 30 days, then annualized. It’s more complicated than the distribution rate because it excludes certain items and requires some adjustments.

Before 1988, a fund company could boost its advertised rate--and make the portfolio more enticing--in a number of ways.

It could include short-term capital gains and any income the manager might earn by writing covered call options against the bonds owned.

A fund could also make its yield look more appealing by purchasing a lot of “premium” bonds--those selling above the prices at which they will ultimately mature. The problem with premiums is that they will eventually disappear, which is another way of saying the bonds will drop in price. (Conversely, some bonds can be bought at discounts to their maturity value and will appreciate over time.)

The SEC-advertised yield includes interest income, plus or minus any amortized adjustments for discounts or premiums. Given the importance most investors attach to yields, the SEC opted for standardization to eliminate misleadingly high numbers.

Money market portfolios use their own ad standard--a seven-day SEC yield.

Of all the ways to measure a bond fund’s investment results, the most important is total return. This takes the concept of yield one step further--by adding in the impact of long-term capital gains and losses stemming from price changes on the bonds held.

The SEC requires that bond-fund ads include total return numbers along with yield data. The 1991 performance of two funds--Dreyfus GNMA and Dreyfus “A” Bonds Plus--illustrates the difference between yield and total return.

The former had a higher yield for the year, 8% versus 7.5%, but wound up with a lower total return of 14.5%, compared to 18.8%. As a more dramatic example, junk bond funds actually lost money in 1989 and 1990 despite double-digit yields. The reason: Falling prices for high-risk bonds more than wiped out the interest earned by the funds those years.

But there’s also a problem with total return: It measures past performance that might not be indicative of future results. The various yield measures often are more predictive, says Jeff Kratz, a vice president with John Nuveen & Co., a Chicago bond-fund company.

“If you invest today and nothing changes, the yield is the return you could expect,” he says.

Municipal bond funds have their own special performance gauge, known as the “taxable-equivalent yield.” Since debt issued by cities, counties and states pays tax-free interest, buyers need a way to compare these investments to taxable returns.

The taxable-equivalent computation does that. To calculate it, you divide the yield available on a muni-bond fund by one minus your marginal tax rate, expressed as a decimal.

For somebody in the top 31% federal bracket, a 6% muni-fund yield is equivalent to 8.7% (6% divided by 0.69) on taxable bonds.

That’s the computation for a nationally diverse portfolio of munis, anyway. But on a fund made up exclusively of California municipals, which spin off interest that avoids both federal and state taxation, the sheltering benefit is greater.

For Californians in the top combined federal and state bracket--which can get as high as 42.5%, according to John Nuveen & Co.--a 6% tax-exempt yield equals an unsheltered 10.4%.