Glossary term
Yield to Worst (YTW)
Yield to worst is the lowest yield an investor can receive from a bond among its yield-to-maturity and applicable call or redemption scenarios, assuming no default.
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What Is Yield to Worst?
Yield to worst, or YTW, is the lowest yield an investor can receive from a bond among the bond's yield-to-maturity and applicable call or redemption scenarios, assuming the issuer makes required payments and does not default. It is a conservative bond-yield measure, especially for callable bonds.
YTW is meant to answer a practical question: if the issuer uses the bond's embedded options in the way that is least favorable to the investor, what yield should the investor expect? It does not cover every possible bad outcome. Default, forced selling, taxes, transaction costs, and reinvestment results can still make actual return lower.
Key Takeaways
- Yield to worst is the lowest relevant bond yield before default risk.
- For many callable bonds, it compares yield to maturity with yield to call.
- YTW is usually more conservative than quoting only yield to maturity.
- A high coupon bond trading at a premium may have a low YTW if it is likely to be called.
- YTW is an estimate, not a guaranteed return.
Basic Comparison
For a simple callable bond, the idea is:
In this expression, YTM is yield to maturity and YTC values are yields to possible call dates. The lowest relevant scenario is the yield to worst.
For example, a bond may have a 5.2% yield to maturity but a 3.4% yield if called at the first call date. If that first-call yield is the lowest scenario, the bond's YTW is 3.4%. Quoting only the 5.2% YTM would overstate the conservative return estimate.
Callable-Bond Interpretation
Yield to worst is especially important when a bond trades above par and the issuer can call it. If interest rates fall, the issuer may redeem the bond and refinance at a lower rate. The investor then receives the call price sooner than expected and loses the future high coupon payments. That can sharply reduce the realized yield.
For discount bonds, the worst case may still be maturity if calling the bond early would help the investor. The direction depends on price, coupon, call price, time to call, and current market yields.
What It Leaves Out
YTW assumes the bond's scheduled or call-scenario cash flows are paid. It does not model default. It also does not solve reinvestment risk. If a bond is called, the investor may have to reinvest at lower yields. If rates rise, the investor may hold a bond with a lower market price even if YTW at purchase looked acceptable.
YTW also depends on accurate call schedules. Bonds can have multiple call dates, make-whole provisions, sinking funds, extraordinary redemption features, or other structures that require careful reading.
The Bottom Line
Yield to worst is the conservative yield investors check before buying callable or option-embedded bonds. It helps prevent a high coupon or attractive YTM from hiding the lower return that could result if the issuer redeems the bond at the least favorable time.