Yield to Worst (YTW)

What Is Yield to Worst (YTW)?

It is a measure that shows the lowest return an investor could get from a bond, assuming the bond is held until either maturity or the issuer decides to call it back early (but without the issuer defaulting). It’s a conservative estimate of the minimum return, helping investors understand the potential risks involved in a bond investment.

How YTW is Calculated?

Calculate Yield to Maturity (YTM): This is the return if the bond is held until maturity, considering both interest payments and any gain or loss from the bond price.

Calculate Yield to Call (YTC): This is the return if the bond is called at its earliest possible date, including any penalties or premiums for early redemption.

Determine YTW: The final YTW is the lower of the YTM and all possible YTC values. This gives you the worst-case yield.

Applications of Yield to Worst

Risk Assessment: YTW is especially useful when interest rates are falling. In such cases, issuers may be more likely to call bonds early, which could result in a lower yield than expected.

Investment Decisions: Investors use YTW to compare bonds, particularly those with call features. It helps them understand the potential risks and make informed decisions about which bonds to invest in.