How does a bond mutual fund make more than 4% per year? I thought bonds were only about 4%?

A couple of ways comes to mind (I did work for bond mutual fund at one time).

Some of the bonds purchased were less than par and because bonds accrete to par at maturity, it must mean the yield to worst (YTW) is above the coupon rate. The deeper the discount to par, the greater the YTW.

Some of the bonds were convertible bonds and when the underlying equity increase in value, these bonds also increase in value in lock-step. As a result, the yield tends to be very high -- far exceeding traditional coupon rates.

Another possibility is buying foreign bonds denominated in dollars in that these bonds may have higher coupon.

Another possibility is to go down in credit quality and buy companies with lower credit ratings. For example, high yield (junk) bonds generally have greater coupons than high (investment) grade bonds.

Another possibility is the fund bought long-date bonds, i.e. the duration of the fund is far longer than its competitors. Other things being equal, long-dated bonds carry higher interest than short-dated bonds -- this is especially true when the yield curve is upward sloppy.

I'm sure someone with more knowledge will chime in, but while bonds typically yeild around 4%, depending on type, a bond fund makes money off the yeild, and ALSO by buying and selling bonds when they appreciate (they can go up in value like stocks). So when it is all said and done, they can beat the yeild of just the bonds they are holding.

The first thing to consider is that there are different types of bonds. A 30year treasury bond is currently paying around 4%. But a 20year corporate bond is over 6%.

Second, bond funds hold bonds that were bought over a period of time. Some of them purchased when bonds had a higher return.